Personal taxes are due soon. Though we’ve covered business taxes to some extent, we would be remiss to not cover something for the self-employed individuals we normally cater to. So we will discuss a little about the difference between a Tax Credit or a Tax Deduction.
Tax Deductions reduce the amount of taxable income that you have. Since you have less taxable income, you have less to pay taxes on. It happens to be a largely roundabout way of reducing the tax liability but, at the same time, you can write-off some of the massive expenditures that you might accrue over the course of the year, such as educational expenses or healthcare. There is even a standard deduction that every individual has access to, which can reduce your tax liability greatly depending on your filing status.
Tax Credits, on the other hand, are credits that directly reduce the amount of income tax that you owe. Rather than going the roundabout way of a tax deduction, a credit simply straight-up reduces what is owed 1-to-1. There are also two varieties of a tax credit: nonrefundable and refundable. Nonrefundable tax credits can help lower the amount of taxes that you owe to zero, but refundable tax credits will take whatever is left over once you have zeroed out your liability as a refund.
While both of these do the same thing in one way or another, it should be noted that both can be applicable depending on the individual. As an example, someone who pursued a higher education can still take the Standard Deduction and maybe even a Student Loan Interest deduction to reduce their taxable income before applying relevant credits to reduce their tax liability further. However, you cannot take a tax credit and a tax deduction for the same qualified expense—you’ll have to pick one or the other.
To figure out which deductions and credits you are eligible for, you’ll likely have to consult a tax professional. But please don’t hesitate to Contact Us if you need bookkeeping help afterwards. We'll help keep your books in the black.
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