How to calculate tax credit

Taxpayers often use the terms "deduction" and "credit" as though they're the same thing, but they're not. They're actually very different terms, and being aware of the distinctions between the two can help you make good choices at tax time -- and maybe put some extra money back in your pocket.

A deduction is a reduction in your taxable income, while a credit is a reduction in your taxes due.
Deductions are calculated as part of your taxable income (you'll find taxable income on line 43 on your form 1040). They are subtracted from gross income, including wages, interest and dividends, and may be even be listed on a separate form, such as a Schedule A.

The tentative tax due is calculated from your taxable income. Credits are applied to that tentative tax and reduce the overall tax due on a dollar for dollar basis.

It's best explained with an example. Let's say you're a single taxpayer with adjusted gross income of $20,000 after your standard deduction. The tax on $20,000 is $2,582.50 (using the tax brackets, that's $835 plus 15% of the amount over $8,350). An additional $500 in deductions would result in tax due of $2,507.50

But what if, instead of deductions, you had additional credits of $500? The $500 credit would reduce that tax, dollar for dollar, to $2,082.50.

In this example, opting for the credit over the deduction resulted in a tax savings of $425. So when all else is equal, it's generally more favorable to take advantage of a credit than a deduction. This is good to know when faced with the option of claiming a deduction or a credit when both may not be allowed -- educational expenses are a good example.

Credits may also be refundable, which means that to the extent you have more credits available than tax owed, you can receive a refund. Deductions are never refundable, since it's a reduction in your income, and reducing your taxable income below zero does not result in an additional refund.

Remember: A credit is a dollar for dollar reduction in your tax due. To the extent you can maximize those credits, your overall tax burden will be reduced -- and you might even be getting some money back.

Top Tax Deductions for Consultants

Consultants are likely to have deductible business expenses that can help you save big on your taxes. A checklist can help you account for every deduction you’re entitled to use. Here are the top tax deductions for consultants.

Read More

Brought to you by TurboTax.com

Seven Things You Didn't Know About Taxes

You know your federal taxes pay for government programs and services, like roads and national defense. And you may even know the difference between FICA and income tax. But did you know if you want to buy sparklers in West Virginia, you can expect to pay a special fee?

Read More

Brought to you by TurboTax.com

2018 Tax Reform Impact: What You Should Know

Congress has passed the largest piece of tax reform legislation in more than three decades. The bill will affect the taxes of most taxpayers, but one key point to keep in mind is that for most people, the bill won't affect your taxes for 2017 (the one you file in 2018).

Read More

Brought to you by TurboTax.com

Video: How to Estimate the Value of Clothing for IRS Deductions

Learn how to estimate the value of clothing for IRS tax deductions as charitable donations. The value of clothing donations to charity are based on published lists of retail values or current thrift store prices. List your donation values on the Form 8283 with the help of TurboTax in this video on filing annual taxes.

Read More

Brought to you by TurboTax.com
Read Full Story