When it comes time to file your taxes, it can be helpful to understand what different tax terms mean. Tax credits and tax deductions are two of the most important terms you’re likely to come across. While these two elements are similar–they both have the potential to save you money–there are important nuances you should be aware of before you file.
What Is a Tax Credit?
A tax credit is an amount of money that directly counts against the amount of tax you owe. Tax credits are available in lots of different situations. They range from credits for pursuing education, to caring for dependents, to buying an electric vehicle. If you qualify for a credit for, say, adopting a child, you will get a certain amount of money–a credit–deducted from the taxes you owe.
What Is a Tax Deduction?
A tax deduction, on the other hand, is something that reduces your taxable income. Instead of getting money back, it actually reduces how much you owe in the first place. If you own a business, for example, you may be able to deduct certain business expenses from your taxable income. The lower your taxable income, the less taxes you pay.
Which One Can I Claim?
In general, taxpayers can claim any tax credits or deductions for which they are eligible. Your eligibility is determined by your income, activities, investments, family status, employment, and more. Since there are numerous rules surrounding who can claim what and how much each person can claim, it may be helpful to consult with a tax professional prior to filing.
For expert guidance navigating tax credits and tax deductions, call the team at Taxation Solutions, Inc. Our tax professionals in Cincinnati are here to help you understand the differences between credits and deductions, and to arm you with the necessary knowledge to maximize your tax savings. Call us today to learn more!