Maximize Your Tax Savings: Understanding Tax Deductions and Tax Credits

We pay all sorts of taxes, including property taxes, school taxes, Social Security taxes, and more. We pay a sales tax every time we buy something from the store. We pay hotel taxes whenever we stay at a hotel. We also pay Federal income taxes to the Federal government on wages, salaries, and other types of income. Did you know there are ways you can save on the amount of income taxes you owe the Federal government?

Here are a few ways you may be able to reduce your tax bill:

Tax Deductions

Income tax deductions and income tax credits are not the same thing. A tax deduction is an amount you deduct from your taxable income before you calculate what taxes you owe.  Your tax bracket determines how much a deduction will save you. Some common deductions include the Charitable Contribution Deduction, the Home Mortgage Interest Deduction, and the Student Loan Interest Deduction.

Tax Credits

An income tax credit is a bit different. Instead of reducing your taxable income, it reduces your tax bill to the Federal government on a dollar-for-dollar basis.  For instance, let’s assume you calculate that you owe the Federal government $2,500 in taxes, but you are eligible for $1,000 credit under the Earned Income Tax Credit program. Your total tax bill after applying the credit would be $1,500.  Some other common credits include the Child and Dependent Care Credit and the Residential Energy Efficient Property Credit.  Some tax credits are aimed squarely at low-income earners while others are more general.

Direct Deposit Your Tax Return

With tax season in full swing, it’s a wise idea to learn different strategies for reducing your tax liabilities. When you’re ready to file, be sure to input your income and tax-deductible expenses correctly to avoid overpaying or underpaying. If you expect to receive a refund check, consider receiving it with a direct deposit so your money is added directly to a bank account or prepaid debit card!

Need help filing your taxes, or have a question for a professional? Find a Tax Preparer near you!