Tax Credits and Tax Deductions – What Are They?

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A Tax Credit is an Amount of Money a Taxpayer is Allowed to Subtract From His or Her Income Taxes Owed.

There are two types of tax credits:

  1. A nonrefundable tax credit – This means that a taxpayer can get a refund only up to the amount that is owed.
  2. A refundable tax credit – This means a tax payer can get a refund, even if it’s more than what you owe.

What are some of the tax credits available for a taxpayer to utilize:

  • A few of the Nonrefundable Personal Credits are listed below:
    • Child and Dependent Care Credits – A Taxpayer can claim a nonrefundable tax credit for a portion of qualifying dependent care expenses paid during the tax year if the taxpayer is gainfully employed.
    • Elderly or Disabled Credit – A Taxpayer can claim a nonrefundable  tax credit if he or she is a) aged 65 before the close of the year, or under age 65, but retired and permanently and totally disabled when retired.
    • Education Credits (American Opportunity and Lifetime Learning Credits) – A Taxpayer can claim two types of educational related tax credits for qualified tuition and related expenses paid or incurred during the tax year.
    • Retirement Savings Contributions Credit – A Taxpayer who is eligible low-income may claim a nonrefundable credit for contributions and elective deferrals to certain retirement savings contribution credit.

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  • A few of the Refundable Personal Credits are listed below:
    • Credit for Taxes withheld on Wages – A Taxpayer is allowed a credit against his or her income tax liability for income taxes withheld from their salaries and wages.
    • Earned Income Credit – A Taxpayer is allowed a refundable credit based on a percentage of his or her earned  income (up to a certain threshold amount) and the number of dependents claimed as qualifying children.
    • Healthcare Credits – A Taxpayer is allowed to claim a refundable credit to assist in paying for individual or family health coverage obtained through a marketplace exchange in his or her state of residency.
    • Alternative Motor Vehicle Credit – A Taxpayer may claim a credit for an alternative motor vehicle placed in service during the tax year.

A Tax Deduction Reduces the Amount of Income that is Subject to Taxation by Federal and State Governments

Some Itemized Deductions Includes:

  • Medical & Dental Expenses
  • Charitable Contributions
  • Mortgage Interests
  • State & Local Taxes Paid

 

For more information and insight email us at [email protected] or contact us at (301) 974-4568.

Diana McCalpin is an accountant who manages a Certified Public Accounting Practice in Laurel, Maryland which performs audit, accounting and tax services to customers. She loves to share information with clients to help them grow their businesses and be profitable.

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