Millions of taxpayers oftentimes overpay on their taxes every year, simply because they do not take advantage of all the tax adjustments, deductions and credits that they are entitled to. Overlooking some of these tax breaks can be a very costly mistake. Claiming all the adjustments, deductions and credits that you are legally entitled to will ensure that you do not leave money on the table.
There is a distinction between adjustments, deductions, and credits, and we shall proceed to look at these below:
Adjustments
These are subtracted from your total income, to determine your adjusted gross income (AGI). Adjustments include the heath savings account deduction, student loan interest deduction, etc. These subtractions from your income are entered on line 23 through 35 on you 1040 tax return.
Deductions
Deductions include your standard deduction or itemized deduction. These, along with your personal and dependent exemptions, are subtracted from adjusted gross income (AGI), to determine your taxable income.
Credits
Tax credits reduce your tax liability on a dollar-for-dollar basis. A tax credit is generally much more attractive than a deduction, because the tax credit directly reduces the actual amount of tax that must be paid on a dollar for dollar basis. A deduction, on the other hand, only reduces the amount of taxable income.
Tax credits are basically of two types: nonrefundable tax credits and refundable tax credits. Nonrefundable tax credits can reduce tax owed to zero, but you won’t get a tax refund for the amount of the credit that exceeds the tax. Refundable credits, on the other hand, after they reduce your tax to zero, you will receive a refund for the amount that exceeds the tax. Most credits, however, both nonrefundable and refundable, are gradually reduced as your income increases, and are eventually phased out and reduced to zero after your income surpasses a certain level.
The primary objective of this article is to empower taxpayers to learn to do their own taxes. For more information claiming all your tax deductions and credits, grab yourself a copy of “Doing Your Own Taxes is as Easy as 1, 2, 3,” ($6.98) on TaxConnections.com.
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