What is the difference between a tax deduction and a tax credit?

Understanding taxes can be a little tricky, so you’re not alone if you’ve ever found yourself scratching your head, trying to figure out the difference between a tax deduction and a tax credit. Don’t worry though, we’re here to guide you through this maze and clarify what these two terms mean. 

Believe it or not, understanding these basics can significantly impact your bottom line and potentially save you some serious money. So, buckle up and let’s dive right in! 

What are Tax deductions?

Think of tax deductions as a way to decrease the amount of your income that is subject to taxation. What does this mean? Quite simply, they chip away at the total income you’re required to pay tax on, thereby reducing the amount you need to pay.

Here’s some common tax deductions in Denver: 

  • If you’re working from home, the home office deduction can be claimed.
  • Medical and dental expenses spanning from surgeries to glasses, and even chiropractor visits.
  • Education-related deductions covering tuition, enrollment fees, and necessary school supplies.
  • Business-related deductions for business expenses, insurance premiums, and costs associated with maintaining a physical store or office if you’re running your own business in Denver.
  • Deductions for donations made to non-profit organizations, both in cash and kind.
  • Housing expenses including property taxes, mortgage interest, and points on your home.

Navigating through these deductions may initially feel daunting, but it’s essential to identify which ones are applicable to you in order to potentially minimize your tax liability. That’s where we can help, with our extensive experience with tax preparation in Wichita KS.

What are Tax Credits?

Think of tax credits as a type of tax perk, directly reducing the amount of tax you owe to the government. Not just a reduction, but a dollar-for-dollar subtraction from your tax bill. For example, if you owe $1000 in taxes but qualify for a $200 tax credit, your tax bill drops to $800.

But it’s important to remember, not all tax credits are created equal. There are two main types: refundable and non-refundable. A refundable tax credit can lead to a tax refund. Say, you owe $500 in taxes but have a $1000 refundable tax credit, you’ll receive the remaining $500 as a refund. On the other hand, non-refundable tax credits won’t generate a refund, they simply reduce what you owe to zero. Sounds great, right? But remember, navigating the path to these credits requires some understanding of tax law, or a really good tax professional.

At Wichita tax, we pride ourselves on our track record of ensuring our clients enjoy the greatest possible savings during tax season. If you’re confused about what deductions or credits you’re entitled to, give us a call and we’d be happy to assist.