How to Calculate Tax Credits

How to calculate tax credits vs. deductionsTaxpayers often use the terms "deduction" and "credit" as though they're the same thing. They are 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 even be listed on a separate form, such as a Schedule A. Maximizing those deductions allows you to reduce your overall taxable income. Your tentative tax due is calculated from your taxable income.

Credits are applied to your tentative tax and reduce the overall tax due on a dollar for dollar basis. Popular credits for 2010 include the Making Work Pay Credit, the American Opportunity Credit and the Earned Income Tax Credit.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 initial tax, dollar for dollar, from $2,582.50 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 are eligible for a refund. Deductions are never refundable since they are a reduction in your taxable income: 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.

Driving for Lyft? Use This Tax Preparation Checklist

So, you decided to become your own boss (at least part-time) and start driving for a ride-sharing company like Lyft. Use the Lyft tax preparation checklist below to organize your income and deductions to make filing your taxes a breeze. Remember, not all items listed will apply to you, but it will give you a good idea on what you need to report as income and what you can claim as a deduction.

Read More

Brought to you by TurboTax.com

Video: The Alternative Minimum Tax (AMT) Explained

Originally created to make sure the wealthy paid taxes even after using tax breaks and loopholes, the Alternative Minimum Tax (AMT) has never been updated and continues to impact middle class Americans more and more each year as a result of inflation. To compensate for inflation, the AMT now includes an exemption amount. This exemption is indexed for inflation so it changes every year.

Read More

Brought to you by TurboTax.com

Energy Tax Credit: Which Home Improvements Qualify?

Taxpayers who upgrade their homes to make use of renewable energy may be eligible for a tax credit to offset some of the costs. As of the 2018 tax year, the federal government offers the Nonbusiness Energy Property Credit. The credits are good through 2019 and then are reduced each year through the end of 2021. Claim the credits by filing Form 5695 with your tax return.

Read More

Brought to you by TurboTax.com

Top 5 Reasons to File Your Taxes Early

Every April, many taxpayers wait until the last minute to file their federal income tax returns. Despite this tendency, there are many reasons to file your taxes early. If you will receive a refund, you may want to submit your return as quickly as possible. Additionally, there are benefits to filing early for those taxpayers who have a balance due.

Read More

Brought to you by TurboTax.com
Read Full Story
Your resource on tax filing
Tax season is here! Check out the Tax Center on AOL Finance for all the tips and tools you need to maximize your return.