Ben Franklin once said, “…in the world nothing can be said to be certain except death and taxes.” Tax season is an exceptionally stressful time for Americans scrambling to properly complete their tax returns. Tax credits and tax deductions are two completely separate things that you should be aware of when filing taxes this year. Lets take a closer look at the two below so that you’re more aware of the differences.
Tax Credit Basics
Tax Credits: “A tax credit lowers your tax bill dollar for dollar.” In this case, the reduction of your tax bill is not based on your income, but on government incentives.
Some common tax credits for 2009 include:
- The Earned Income Tax Credit (EITC), which applies to working individuals and families with moderate income
- Child Tax Credit applies for parents or guardians for their qualifying children. Those kids are defined as a “…child born any time during 2008 even as late as New Year’s Eve 2009.”
- The Dependent Care Tax Credit (aka the Child-Care Tax Credit) for those who manage the daycare or child care services for their dependent children.
- First Time Home Buyer Credit is for those who purchased a new home and qualify for the terms set out in the 2009 Recovery Act.
- Energy Star Appliance purchases are entitled to “Federal tax credits for consumer energy efficiency.”
- Energy Upgrade Credits are available for those who retrofitted their homes with new energy efficient (and qualified) skylights, windows and doors.
- Aside from the home buyer and energy efficiency credits, a number of other credits exist courtesy of The American Recovery and Reinvestment Act of 2009, such as the Making Work Pay Tax Credit, Money Back for New Vehicle Purchases, Education benefits, up to $2,400 in Unemployment Benefits Tax Free in 2009, $250 for Social Security Recipients, Veterans and Railroad Retirees and a Health Coverage Tax Credit.
Now that you’re more aware of the tax credits available, it’s time to move on to tax deductions.
Tax Deduction Basics
Tax Deductions: are write offs that can lower the amount of taxable income for a year. Those filing tax returns can choose to file either standard (amount set by government) or itemized deductions (where tax filers have to list and back up claimed deductions with documentation). Some common tax deductions include:
- Charitable donations of cash or goods
- Medical and dental expenses
- PointsFrom a home mortgage
- Interest expenses, in relation to home mortgages and student loans
- Losses to your home, household items and vehicles not covered by insurance payments
- Business expenses for qualifying home, travel, entertainment and transportation costs
- Casualty, disaster, and theft losses resulting from ” damage, destruction or loss of your property from any sudden, unexpected, and unusual event such as a flood, hurricane, tornado, fire, earthquake or even volcanic eruption.”
- Educational expenses incurred from taking qualified classes directly related to job performance
Whether you opt to prepare your tax return using tax preparation software or plan on hiring a professional to relieve you of the task, you need to be aware of the tax credits and deductions available to you so that you can save as much as possible.