Understanding Tax Credits and Deductions
Every year, workers and business owners embark on tax-filing journeys that are often confusing but highly beneficial. As many are aware, tax refunds and tax breaks in the form of deductions can drastically reduce liability. While scanning your favorite tax preparation website, it’s important to know that tax credits and deductions are stark contrasts but work in tandem with each other.
Your income tax liability can be reduced through tax credits. The EITC, for example, gives dollar-for-dollar credit to those with low incomes and qualifying dependents. Refund checks are a direct result of stackable tax credits, offered to both business owners and working adults alike. Tax credits are always worth more than deductions, although many do have expiration dates.
The Internal Revenue Service (IRS) houses hundreds of available tax credits, if not more, none of which have a preset amount; they are contingent upon income, with no two credits worth the same amount. Your filing status plays the largest role in what tax credits you are eligible to receive.
For those looking for the largest rebate check, you’ll want to peruse widely available information on the Internet or at your tax preparer’s office to discover which tax credits fit your individual situation.
If you’re concerned that your income is too high and may increase your tax liability, you’ll need to look for tax deductions. Businesses, which have higher gross earnings than individuals, are the biggest proponents of tax deductions because they lower net income, which in turn lowers liability. The less you make, the less you pay—that’s the mantra by which businesses and high-earning individuals live.
The IRS issues standard deductions based on filing status; married filing separately, head of household, married filing jointly, and individual taxpayer statuses all have unique standardized deductions that range from $6,100 to $12,200. When filing taxes, you’ll usually receive your standardized deduction at the beginning of your filing process.
Itemized deductions serve two purposes: they can determine whether your standardized deduction is too low and can lower your tax liability even further. Property taxes, medical expenses, moving expenses, and gas mileage accrued during business endeavors are just some of the many itemized deductions one may claim. The IRS has a specific worksheet that can help you determine which route you must take.
Food donations, one of the newest permanent tax deductions, offer retailers and anyone who sells food itemized deductions of up to 15 percent of their gross annual incomes. An enhanced deduction of a food item’s base value is also available, and a separate worksheet can determine whether one (or both) will lower your tax liability. When it comes to using itemized tax deductions, such as donations, you should keep accurate records because you could be audited at any time. To take full advantage of the enhanced tax deduction for food donations, retailers should improve these records to track donations by SKU rather than as a total poundage. This will allow you to accurately report base cost and margin for each product donated.
Which Is More Beneficial?
Both tax credits and tax deductions have self-contained benefits, and both can be used simultaneously on many tax forms. It’s important to note that both tax instruments have strict accuracy rules, meaning your tax return could be rejected and even subject to perjury laws if found to be completed fictitiously. With each passing year, new tax breaks are rolled out, so you should check the IRS website from time to time to see whether any relevant new tax laws or credits have been introduced.