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Home / Business / What is the difference between a tax credit and a tax credit? – The Motley Fool

What is the difference between a tax credit and a tax credit? – The Motley Fool

You get the offer between a tax deduction of $ 1000 or a tax of $ 1000: What are you taking? If you are not familiar with the difference between tax credits and tax credits, you do not know which one is the better deal for your tax return.

They both reduce the amount of your hard earned money going to the government, but in different ways. Below I will explain how the tax deduction and tax credits mechanics are different, as well as going through some of the most popular ones.

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9659005] What is a tax deduction?

Tax deductions reduce the amount of taxable income in the IRS eyes, or in other words, how much money the government will consider when deciding what interest rate to use to tax your earnings and how much money to use this rate to count up your tax bill.

If you take a tax credit of $ 1000, your taxable income for the year will be reduced by $ 1000. Depending on your annual income and how many tax credits you qualify for, you may fall into a lower income tax, resulting in the state tax a smaller percentage of your earnings.

Although your tax deductions do not change the bracket you use, so you can be taxed at a lower price, they can still reduce the amount you owe to yourself in tax by reducing your taxable income. You can figure out how much you save by multiplying the value of the deduction of the income tax bracket you are in. For example, a tax credit of $ 1000 would be worth $ 220 from the tax bill for someone in the 22% income tax bracket.

When it comes time to make your taxes, you get the choice between a standard deduction and a specified deduction. The standard deduction can be changed from year to year and depends on your tax return status. Individuals will receive a standard $ 12,000 deduction when entering their taxes for the 2018 tax year, and married couples will file separately. Married couples filing jointly has a standard deduction of $ 24,000 and the housekeeper has a standard deduction of $ 18,000. These numbers are slightly higher for the elderly, blind and disabled.

It is worth noting that you cannot take standard deductions and specify deductions at the same time. You have to choose one or the other. The only time it makes sense to waive the standard deduction, rather than specifying your deductions, is when you think the other tax deductions you qualify for exceed the value of the standard deduction. Tax-filing software automatically calculates whether a standard deduction or specified deduction is your better option, so you don't have to worry about choosing that route.

An example: For people who are self-employed and have a number of business expenses to write off, specified deductions can be reasonable.

Other popular tax deductions filers can depreciate their tax revenue including medical expenses exceeding 7.5% of your adjusted gross income (AGI), charitable contributions, government revenue, and property taxes, and mortgage rates.

What is a tax credit?

Tax credit reduces the amount of tax you owe, but instead of doing so by reducing your taxable income, your tax credit reduces your actual tax liability, which acts as a dollar-to-dollar reduction in your tax bill.

If you qualify for a $ 1000 tax, the total amount you owe will be reduced by $ 1000. So to answer the question at the beginning of this article: You're much better at taking the $ 1000 tax credit over $ 1000 tax credits

For tax credits, there are two main types: refundable and non-refundable. Refundable tax credits offer a better deal, if you can benefit from them, because if the value exceeds the tax liability, the government will actually refund you the difference. Non-refundable tax credits can reduce the tax liability to zero, but the government does not refund any profits when you hit zero.

One of the most common refundable tax credits is the payroll tax (EITC). It is designed to help lower income families, especially those with dependent children, and save on their taxes. The maximum income requirement to be used when qualifying for the EITC depends on your tax liability status and the number of eligible children. This tax credit can be worth $ 519 for the 2018 tax year for couples without children, $ 3,461 for families with one child, $ 5,716 for families with two children and $ 6,431 for families with three or more children. If these amounts exceed your total tax liability for the year, the government will give you the difference in your tax refund. This means that it is still worth submitting a return if you want to qualify for this benefit, even if your income for 2018 is less than $ 12,000, which means you are not legally required to file a tax return.

Tax credits are provided for life circumstances such as having children, adopting, pursuing higher education, or caring for an older parent. If you archive your taxes with a program, you should ask a number of questions to find out which tax credits you qualify for. If you receive any tax credits, they are automatically taxed for the year.

While most tax software takes care of the complex math for you, it still pays to understand how tax credits and tax credits work so you have an idea of ​​how they affect your taxes. It is also a good idea to investigate the type of expenses or life events that qualify for a tax practice so that you can plan to maximize them. You may very well discover a credit or deduction you didn't even know was available to you.

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