What are Tax Credits and Deductions?
Tax credits and deductions are valuable tools that can significantly reduce the amount of income tax you owe. While both lower your tax bill, they do so in different ways. A tax credit directly reduces the amount of tax you owe, dollar for dollar. A deduction, on the other hand, reduces your taxable income, resulting in a lower tax bill but not a dollar-for-dollar reduction.
Common Tax Credits for Individuals
Numerous tax credits are available, depending on your circumstances. Some examples include:
- Earned Income Tax Credit (EITC): A credit for low-to-moderate-income working individuals and families.
- Child Tax Credit (CTC): A credit for qualifying children.
- Child and Dependent Care Credit: A credit for expenses paid for the care of qualifying children or other dependents to allow you to work or look for work.
- American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC): Credits for qualified education expenses.
- Saver’s Credit: A credit for low-to-moderate-income taxpayers who contribute to a retirement account.
It’s crucial to research the specific requirements and limitations for each credit to determine your eligibility.
Common Tax Deductions for Individuals
Similar to credits, various deductions can lower your taxable income. Some common deductions include:
- Standard Deduction: A fixed amount you can deduct, depending on your filing status.
- Itemized Deductions: Deductions for specific expenses, such as medical expenses, charitable contributions, state and local taxes (subject to limitations), and home mortgage interest. You can only itemize if the total exceeds your standard deduction.
Carefully review the IRS guidelines to understand which deductions you qualify for and how to accurately claim them.
Finding More Information
The information provided here is a general overview. For detailed information on specific credits and deductions, including eligibility requirements and limitations, consult the official IRS website or a qualified tax professional. Accurate record-keeping is essential for claiming these benefits.
Disclaimer:
This information is for general guidance only and does not constitute tax advice. Consult with a tax professional for personalized advice based on your specific financial situation.