Tax Credits and Tax Deductions: What's the Difference?

As we move through the first quarter of 2017 tax season is already upon us.  If you are concerned with reducing your liability knowing the difference between tax credits and tax deductions can have an impact.  Both of these methods can save you big money but in very different ways.  Check out this article published by NerdWallet to learn how to maximize your savings.

Tax Credits vs. Tax Deductions
Published September 9, 2016

Tax credits and tax deductions may be the most satisfying part of preparing your tax return. Both reduce your tax bill, but in very different ways.

Tax credits directly reduce the amount of tax you owe, giving you a dollar-for-dollar reduction of your tax liability. A tax credit valued at $1,000, for instance, lowers your tax bill by the corresponding $1,000.

Tax deductions, on the other hand, reduce how much of your income is subject to taxes. Deductions lower your taxable income by the percentage of your highest federal income tax bracket. So if you fall into the 25% tax bracket, a $1,000 deduction saves you $250.

The catch to tax credits

Some tax credits are intended to help cover individual costs around adopting a child, child care expenses or caring for an elderly parent.

But these are nonrefundable tax credits.  If you don’t owe a lot in taxes to begin with, you don’t get the full value if the credits take your tax bill below zero.  In other words, a $600 tax bill combined with a $1,000 credit doesn’t get you a $400 tax refund check.

Other credits are refundable. If you qualify to take refundable tax credits — things like the Earned Income Tax Credit, the Premium Tax Credit, the Child Tax Credit and the Additional Child Tax Credit — the value of the credit goes beyond your tax liability and can result in a refund check.

The IRS lays out specific criteria you must meet to qualify for both nonrefundable and refundable credits.

As you run the tax credit calculations in your return, keep in mind that you must determine your tax liability before you apply any credits. The credits don’t reduce your taxable income.

But tax deductions do.

The catch to tax deductions

There are two types of tax deductions.

The standard deduction is a one-size-fits-all reduction in the amount of your income that’s subject to tax. You don’t have to do anything to qualify for the standard deduction or provide any documentation.

You can claim the standard deduction on whichever form you file: Form 1040, 1040A or 1040EZ. The amount varies depending on your filing status. The standard deduction in 2016 for single filers and married couples filing separately is $6,300; it’s $12,600 for married couples filing jointly. For those filing as heads of household, the standard deduction is $9,300. In 2017, the standard deduction for single filers and married couples filing separately is $6,350; it’s $12,700 for married couples filing jointly. For those filing as heads of household, the standard deduction in 2017 is $9,350.

But you may be better off opting to use the second type of deduction, the itemized deduction, instead.

Itemizing allows you to total the amount you spent on allowable deductions such as home mortgage interest, medical expenses or charitable donations. If together they exceed the value of the standard deduction, you’ll want to itemize.  You’ll need to use the regular 1040 filing form and Schedule A.

Taking the standard deduction or itemized deductions is an either/or situation.  You can claim one kind or the other, but not both.

And, just as with tax credits, taking certain deductions requires meeting certain qualifications based on your filing status, current life events and the amount of your income that’s taxable. Be sure you meet IRS criteria to qualify for both tax credits and deductions.


To read the original article, visit NerdWallet.com

6 Tax Deductions Homeowners Won't Want to Miss

Last year was a big year for Richmond's Real Estate Market! If you bought a home, you know how expensive it can become.  Take advantage of all that's afforded you this tax season, and deduct some of those homeownership costs!

6 Tax Deductions Homeowners Won't Want to Miss
By Maurie Backman, January 4, 2017

Though there are plenty of good reasons to buy a home, owning property can be a costly prospect. From maintenance to insurance to real estate taxes, there are numerous costs that come with buying a home. But one major upside to homeownership are the tax benefits that come along with it. If you're a new homeowner, here are six deductions you don't want to miss out on.

1. Mortgage interest deduction
Looking at your mortgage statement can be a demoralizing prospect during the early years of homeownership, especially once it becomes obvious that the majority of your payments are going toward the interest portion of your loan and not its principal. But before you get too down, remember: That interest will serve as a helpful tax deduction when the time comes to file your taxes. You can deduct interest on up to a $500,000 mortgage as a single tax filer or $1 million as a couple filing jointly.

2. Home improvement loan interest deduction
Looking to spruce up your home? You might get a tax break for it. If you borrow money for the purpose of making home improvements, you can deduct whatever interest you pay on that loan with no upper limit. The only thing to keep in mind is that your loan must be used for capital improvements to your home, not repairs. If you borrow money to put up a new fence, finish your basement, or build an addition, you can deduct whatever interest you pay on your taxes. But if you take out a loan to repair a leaky roof, you won't be eligible for a deduction.

3. PMI deduction
Many homeowners aim to make a 20% down payment to avoid getting hit with private mortgage insurance Opens a New Window. , or PMI. But if you're stuck paying PMI, there's some good news: You can deduct your premiums provided you don't make too much money. The PMI deduction starts to phase out when you earn $50,000 a year as a single tax filer or $100,000 as a couple filing jointly. And the deduction goes away completely when you earn more than $54,000 as a single filer or $109,000 as a couple filing a joint return.

4. Mortgage points deduction
Some borrowers pay mortgage points, which are up-front fees, in exchange for a lower long-term interest rate. A point on a mortgage is equal to 1% of the loan amount, so the higher your mortgage, the more you'll pay per point. On the other hand, points can serve as a tax deduction, either immediately or over time. If the points you pay are consistent with what most lenders are charging and you use your loan to buy your primary home, you can typically deduct the entire cost of your points right away. Otherwise, you'll need to spread out that deduction over the life of your loan.

5. Property tax deduction
The average U.S. homeowner pays a little more than $2,000 a year in property taxes, but in some states, that figure can be anywhere from two to five times as much (or more). And while nobody wants to spend a fortune on property taxes, they can serve as a nice tax break. If you're going to claim a property tax deduction, just make certain to do so the year you actually make your payments. Property taxes are often billed quarterly, so it could be that you pay the first part of your 2018 taxes at the end of 2017 -- in which case you'd take the deduction for the 2017 tax year.

6. Home office deduction
If you're self-employed and have a dedicated space in your home that you use for work purposes, you can claim a home office deduction against your income. To calculate your tax benefit, figure out how much you spend annually on costs like water, electricity, internet service, and homeowners' insurance. Next, calculate the amount of space your office takes up relative to your home, and then prorate your expenses to arrive at your deduction. For example, if you spend $3,000 a year on eligible expenses and your office takes up 10% of your home's total square footage, you can claim a $300 deduction.

Whether you're new to homeownership or have carried a mortgage for years, it pays to learn more about the tax deductions available. The more you're able to claim, the more cash you'll manage to pocket and keep away from the IRS.

Original article appeared on foxbusiness.com