When people talk about turning in their taxes and potentially getting money back for the year, they are referring to tax credits and tax deductions. It is not uncommon for people to use these two terms interchangeably, but they are actually referring to two different forms of income in tax planning. Spring Hill residents might want to know the difference between these two terms when they are filing their taxes because they modify taxes very differently. A tax deduction reduces a person’s taxable income, while a tax credit reduces the overall tax bill that they are filing.

Tax Deductions

Most people assume that tax deductions are a way to lower the percentage of taxes on someone’s income, but this is not entirely the truth. A tax deduction reduces how much of a person’s income is subject to taxes, not necessarily the taxes themselves. When it comes to tax planning, Spring Hill residents need to be aware that deductions lower your taxable income based off of the percentage of the tax bracket that they fall into. Keep in mind that there is more than one way to deduct taxes, such as with a standard deduction versus itemizing for tax deductions.

Tax Credits

On the other hand, a tax credit directly reduces the amount of taxes a person owes by giving them a dollar for dollar reduction. Unlike tax deductions, tax credits are not subjectable to change based on the tax bracket a person falls into when they are making preparations for tax planning. Spring Hill residents should be made aware that some tax credits are not refundable, meaning that if someone owes a lot of taxes in the first place, they won’t get any of that money until their tax bill is below zero. For example, a person who claims a tax credit for having a child is considered one of the credits that is refundable.

*Disclaimer: The views expressed here are those of the authors and do not necessarily represent or reflect the views of Suncoast CPA Group*

Tax Planning Spring Hill