The terms “tax credit” and “tax deduction” often get confused because they both relate to financial savings on your taxes. However, credits and deductions are not the same thing. Keep reading to find out how they differ so you can make savvy tax decisions now and in the future.
What Is a Tax Credit?
A tax credit is an exact dollar amount reduction of your tax liability. If you are eligible to claim a tax credit, the amount you qualify for is the amount you can subtract from any taxes owed. In some cases, a tax credit can even translate into a tax refund.
Some popular tax credits include:
- Earned Income Tax Credit
- Child and Dependent Care Credit
- American Opportunity Tax Credit
- Lifetime Learning Credit
There are, of course, many more tax credits available depending on where you are in life, how many people are in your household, and what your financial situation is. Working with a tax professional before and during filing is a great way to ensure that you’re taking advantage of all possible credits.
What Is a Tax Deduction?
Unlike tax credits, tax deductions don’t offer dollar-for-dollar savings. A $1,000 tax deduction won’t save you $1,000 on your taxes. That’s because tax deductions aren’t applied directly to your tax liability. Instead, they are applied to your taxable income. Deductions save you money by reducing how much of your income is taxed.
Like tax credits, there are all kinds of tax deductions available based on your occupation, household, and income level. Some of the most commonly taken deductions are:
- Charitable donations
- Medical and dental expenses
- Mortgage interest
- Student loan interest
Figuring out what deductions you can take is just the first step. You also need to assess if it’s worth it to take individual deductions rather than the standard deduction. Again, working with a tax professional is the best way to ensure that you’re making the best financial decisions and taking advantage of all the savings opportunities for which you qualify.
For assistance navigating tax credits, deductions, and filing in San Antonio, contact the team at Taxation Solutions, Inc. We are your local tax experts and we’re here to help you make the most of your money. Call us today!