Even for people who have been paying taxes for years, it can be difficult to understand or keep track of all of the terminology and concepts that are contained in our tax returns. For many of us, we may hand everything over to our tax-preparer, or answer hundreds of questions from a computer program, or simply follow the instructions and make the calculations while manually preparing our tax returns. In any of these scenarios, we can get caught up in filling in all of the blanks, which makes it easy to overlook why we’re entering the numbers that we are. With this in mind, it is understandable that there are questions that you are sometimes afraid to ask. One of these is: what is the difference between a tax credit and a tax deduction?
What are Credits and Deductions?
When it comes to your tax return, both credits and deductions are a good thing. This is because they both reduce your tax obligation. A tax deduction is a reduction in your taxable income. A tax credit, on the other hand, is a direct reduction of your tax obligation. For this reason, tax credits are far less available to claim than tax deductions.
If you are an individual who makes $75,000 per year, and you qualify for a $7,500 tax deduction, your taxable income decreases to $67,500. This $67,500 will then be taxed within your appropriate tax bracket. For 2017, that would be $5,226.25 plus 25% of the excess over $37,950. This means that your tax owed would be 5,226.25 + (.25)(67,500–37,950) = $12,613.75.
Every year, taxpayers are entitled to either itemize their tax deductions or to take a “standard deduction.” For the 2017 tax year, the standard deduction for a single filer is $6,350, and $12,700 for married couples filing jointly.
A tax credit results in a dollar for dollar reduction in your tax obligation. So if your tax owed is $13,000 and you claim a $7,500 tax credit, your tax owed decreases to $5,500. However, if you have a tax credit of greater than your tax obligation, do not expect to get a refund of the difference. The reason for this is that almost all tax credits are non-refundable, meaning you can erase a tax obligation, but you will not be owed any money. Examples of tax credits include child care expenses, elder-care expenses, home office expenses, and an electric vehicle tax credit.
You Need a Tax Attorney
If you or your business need tax advice, please call me. I have practiced tax law for more than two decades and have established a reputation as a strong, professional tax attorney. I understand the importance of utilizing tax advantages for the benefit of your family and your business. You can reach The Law Offices of Robert S. Thomas by phone at 847-392-5893 or visit our website to set up a consultation.