Deductions versus Credits: How Do They Affect My Refund?

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-ARTICLE BY LARRY HOLMES, CPA. USC - MASTER OF BUSINESS TAXATION.

We all work for our money and we all want to see our hard-earned dollars come back to us from the IRS. You don’t need a master’s degree in accounting to tilt the tables in your favor. Understanding how deductions and credits affect your situation puts you in a position to file with confidence and assurance that you are doing all you can to increase your bottom line.

The difference between a credit and a deduction is commonly misunderstood, and many people use the terms interchangeably. Here is what you need to know:

Deductions decrease your taxable income.

Your taxable income is the portion of your annual income that’s subject to federal and state taxes. Deductions help decrease that amount, making less of your income taxable — reducing the amount of taxes you owe.

How a deduction affects your income varies based on the amount of the deduction and your tax bracket.

Let’s break that down:

  • If your household happens to fall into the 24% tax bracket for 2019, a $1000 deduction will net you a $240 reduction in your taxes owed.

  • If you file single and earned between $39,476 and $84,200 for 2019 – putting you into the 22% bracket – then a $100 deduction would result in a savings of $22. (Pro Tip...Those old clothes you’ll never wear again? Yep, that donation is a deduction.)

Credits reduce your tax bill dollar for dollar.

Some of the more commonly claimed credits include:

  • The Child and Dependent Care Tax Credit – While this particular credit does depend on your household income, many people save up to $2,100 every year just for childcare-related expenses. If you’ve got even one child in daycare, you know just how much a credit like this can help ease the burden of that massive weekly bill.

  • The Earned Income Tax Credit (EITC) – The EITC was originally established in 1975 to benefit working taxpayers, particularly those in the blue-collar sector. Today, individuals filing single or as head of household are eligible to receive a credit of up to $6,557, depending on their income and the number of children they support.

It’s important to note that the credits above are specifically designed to help lower- and middle-income households prosper and save. If you don’t happen to know your tax bracket, we’ve got you covered.

The bottom line: Holmes & Associates is on your side.

Holmes & Associates is designed to make the world of taxes more accessible and easier to understand, so you can file with confidence and keep more of your hard-earned money. We have been helping people and small businesses not only save money but also grow since 1986. Reach out to us today for a Free Consultation and see how we can help your bottom line.