Tax credits and tax deductions may be the most satisfying part of your tax return. Both reduce your tax bill, but in very different ways.

Tax credits directly reduce the amount of tax you owe, giving you a dollar-for-dollar reduction of your tax liability. A tax credit valued at $1,000, for instance, lowers your tax bill by the corresponding $1,000.

Tax deductions, on the other hand, reduce how much of your income is subject to taxes. Deductions lower your taxable income by the percentage of your highest federal income tax bracket. So if you fall into the 25% tax bracket, a $1,000 deduction saves you $250.

The catch to tax credits

Some tax credits are intended to help cover individual costs around adopting a child, child care expenses or caring for an elderly parent.

But these are nonrefundable tax credits.  If you don’t owe a lot in taxes to begin with, you don’t get the full value if the credits take your tax bill below zero.  In other words, a $600 tax bill combined with a $1,000 credit doesn’t get you a $400 tax refund check.

Other credits are refundable. If you qualify to take refundable tax credits — things like the Earned Income Tax Credit, the Premium Tax Credit, the Child Tax Credit and the Additional Child Tax Credit — the value of the credit goes beyond your tax liability and can result in a refund check.

The IRS lays out specific criteria you must meet to qualify for both nonrefundable and refundable credits.

As you run the tax credit calculations in your return, keep in mind that you must determine your tax liability before you apply any credits. The credits don’t reduce your taxable income.

But tax deductions do.

The catch to tax deductions

There are two types of tax deductions.

The standard deduction is a one-size-fits-all reduction in the amount of your income that’s subject to tax. You don’t have to do anything to qualify for the standard deduction or provide any documentation.

You can claim the standard deduction on whichever form you file: Form 1040, 1040A or 1040EZ. The amount varies depending on your filing status. The standard deduction in 2016 for single filers and married couples filing separately is $6,300; it’s $12,600 for married couples filing jointly. For those filing as heads of household, the standard deduction is $9,300. In 2017, the standard deduction for single filers and married couples filing separately is $6,350; it’s $12,700 for married couples filing jointly. For those filing as heads of household, the standard deduction in 2017 is $9,350.

But you may be better off opting to use the second type of deduction, the itemized deduction, instead.

Get Started with Itemizing

Itemizing allows you to total the amount you spent on allowable deductions such as home mortgage interest, medical expenses or charitable donations. If together they exceed the value of the standard deduction, you’ll want to itemize.

Taking the standard deduction or itemized deductions is an either/or situation.  You can claim one kind or the other, but not both.

And, just as with tax credits, taking certain deductions requires meeting certain qualifications based on your filing status, current life events and the amount of your income that’s taxable.

To be sure you meet IRS criteria to qualify for both tax credits and deductions, call or message The House of Taxes today!

IRS Liens Can Demolish Your Good Credit and Borrowing Capacity!

By filing federal tax liens, the IRS can make your life miserable.  Federal Tax Liens are public records that indicate you owe the IRS various taxes. They are filed with the County Clerk in the county from which you or your business operates.

Because they are public records they will show up on your credit report. This often makes it difficult and sometimes even impossible for a taxpayer to obtain any financing, even for an automobile or a home.

In addition, Federal Tax Liens can tie up your personal property and real estate. Once a Federal Tax Lien is filed against your property, you cannot sell or transfer the property without having the lien removed so that you can transfer a clear title.

Often, taxpayers find themselves in a no-win situation where they have property against which they would like to borrow, however, due to the Federal Tax Lien, they cannot use it as collateral secure a loan.


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