Wednesday, March 4, 2015

Tax Deductions and Credits

 What is the Difference Between a Tax Deduction and a Tax Credit?

It is that time of year again, tax time!  There are many different terms involved in calculating your taxes that many taxpayers may not know the meaning of or how they affect the amount of tax owed for the year.  Two items that are often confused include tax deductions and tax credits.  There is a huge difference in how each affects the amount of tax owed for the year.

A tax deduction is deducted from your adjusted gross income prior to calculating the amount of tax owed.  It effectively reduces the amount of income that will be used to calculate the tax owed.  A deduction can never reduce your income below zero and cannot be carried forward from year to year.

A tax credit is subtracted from the total amount of tax owed for the year.  For instance, if you owe $4,000 in federal taxes for the year and you have a tax credit, you subtract the credit from the $4,000 owed.  If your tax credit exceeds the total tax owed, then you will receive a refund for the excess amount of the credit.  It is important that you ask your tax professional about any tax credits that may be available to you as it effectively reduces the amount of tax that you owe for the year and could result in much larger refunds.

One important difference to remember regarding tax credits and tax deductions is that a tax credit is a dollar for dollar credit against taxes owed and a deduction effectively reduces the amount of income subject to tax.

Attorney Angel Oliver / McGrath and Spielberger, PLLC assist clients with all sorts of tax matters, both federal and state (including but not limited to North Carolina and South Carolina).