By Marc Pearlman
A common misconception among taxpayers is that a tax credit is the same as a tax deduction. This is not only false, it's a potentially expensive case of mistaken identity.
Simply stated, tax deductions reduce taxable income. A lower taxable income translates into fewer taxes paid by the taxpayer. The IRS has created two methods for utilizing tax deductions. A taxpayer can either take a standard deduction or take itemized deductions. There are a few factors to consider when deciding which route to go.
The easier of the two routes is the standard deduction, which the IRS makes available to the majority of taxpayers. However, familiarize yourself with eligibility requirements before arbitrarily going this route. For example, a married individual filing a separate return whose spouse itemizes deductions must also itemize.
The standard deduction amounts are set forth by the IRS and are adjusted yearly based on filing status and inflation. While taking the standard deduction is the easier of the two methods to calculate, the standard deduction may not save you the most money. This is when the itemized deductions may come into play. If itemizing your deductions will save you more money, then it is prudent to itemize and is worth the extra work.
Itemizing deductions often benefit taxpayers who paid interest or taxes on a home, had big out-of-pocket medical expenses, made large charitable donations or had sizable unreimbursed employee business expenses.
A tax credit, on the other hand, is a dollar-for-dollar reduction of taxes owed. Tax credits are valuable and you Read the full article »