Understanding the financial benefits of both tax deductions and tax credits can significantly ease your tax burden; however, they function in distinct ways. Taking full advantage of available deductions and credits can save you substantial amounts of money on your taxes. This article will elaborate on the differences between tax deductions and tax credits and provide insights into how they work.
### Tax Deductions: Lowering Your Taxable Income
A tax deduction reduces the portion of your income subject to taxation. One of the most recognized deductions on federal income tax returns is the standard deduction. For example, if your annual income is $50,000, and the standard deduction for a single filer in 2024 is $14,600, you would deduct this amount from your gross income, leaving you with a taxable income of $35,400.
### Tax Credits: Reducing Your Tax Bill
In contrast, tax credits directly decrease the amount of tax you owe. For instance, the Child Tax Credit offers up to $2,000 for each dependent child under 17 years old. Unlike a deduction, a credit cuts down your tax bill on a one-to-one basis. Other notable credits include the Earned Income Tax Credit, the American Opportunity Tax Credit, and the Lifetime Learning Credit. Refundable credits may provide a refund even if you owe no tax, while non-refundable credits can only lower your tax liability to zero.
### Comparing Deductions and Credits
Choosing between a tax deduction and a tax credit might seem tricky, but credits generally offer more value. For instance, a $100 tax credit reduces your taxes by a full $100. On the other hand, a $100 deduction cuts your taxable income by $100, translating to a smaller tax saving depending on your tax bracket. If you fall into the 24% bracket, a $100 deduction saves you $24 in taxes.
### Itemizing vs. Standard Deductions: What’s Right for You?
Everyone is eligible for the standard deduction, which depends on your filing status. Certain groups, like the elderly or disabled, qualify for higher deductions. Alternatively, itemized deductions can be claimed when their total exceeds your standard deduction. Common itemized deductions include significant medical and dental expenses, state and local taxes, property taxes, charitable contributions, and mortgage interest.
For the 2024 tax year, the standard deduction amounts are $14,600 for single filers and $29,200 for married couples filing jointly. For itemizing to be advantageous, your total eligible deductions must exceed these amounts. For example, if your itemized deductions sum up to $29,600, you’d opt for itemizing over the $29,200 standard deduction for joint filers.
Previously, under tax reform, about 90% of taxpayers chose the standard deduction, enticed by its increased value and the reduction or elimination of several itemized deductions.
### Need Assistance? TurboTax Has You Covered
TurboTax Live tax experts are available throughout the year to answer any questions and help you navigate these decisions in English or Spanish. They can review, sign, and file your return, ensuring you get the maximum refund.
Whether you prefer DIY tax filing or opt for a professional to handle it, TurboTax guarantees to secure every dollar and provide the highest possible refund. Trust TurboTax to navigate your taxes efficiently and maximize your financial benefits.
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