While tax credits and deductions can reduce your tax liability and potentially increase your refund, understanding their differences is crucial for optimizing your tax filings and ensuring you don’t leave money on the table. An experienced accountant can explain these strategies and advise you on ways to maximize them.

What Is a Tax Credit?

A tax credit is an amount you can subtract directly from the taxes you owe to the government. It is a benefit that reduces your tax bill on a dollar-for-dollar basis. For instance, if you owe $1,000 in federal taxes and are eligible for a $300 tax credit, your net liability reduces to $700. Examples of tax credits include the Earned Income Tax Credit, Child Tax Credit and American Opportunity Tax Credit.

• Nonrefundable tax credits: These can reduce your tax liability to zero, but you won’t receive a refund of the excess amount.
• Refundable tax credits: These can reduce your tax liability to below zero, resulting in the IRS owing you money.

What Is a Tax Deduction?

A tax deduction reduces the amount of your income that is subject to tax, thereby decreasing your overall tax liability based on your tax bracket.

• The standard deduction is a flat amount that varies according to your filing status. The IRS adjusts it annually for inflation.
• You can also deduct specific expenses from your taxable income, such as mortgage interest, state and local taxes and charitable contributions.

Work With Arizona’s Best Tax Accountants

An expert accountant can advise you on the best ways to get the full amount of money you are eligible for under IRS regulations.

• Expertise and precision: Tax laws are complex and continually evolving. Clear View Business Solutions’ team stays abreast of these changes and understands the nuances of credits and deductions when preparing and planning your taxes.
• Strategic planning: Trust our experienced accountants to provide strategic advice on how to plan for the upcoming year, potentially increasing your eligibility for various credits and deductions. They can help you make informed decisions that align with your overall financial goals.
• Detailed record-keeping and documentation: Accountants can recommend a practical system for maintaining detailed financial records throughout the year. Accurate bookkeeping is essential for claiming tax credits and deductions and gives you essential documentation in case of an IRS audit.
• Error reduction: Filing your taxes can be an intimidating, error-prone experience if you’re not well-versed in tax regulations. Hire a knowledgeable accountant to correct mistakes and help you avoid audits and penalties.

Choose Clear View for Accounting Oversight

Understanding the difference between tax credits and deductions is fundamental to effective tax planning and saving money. Hiring an accountant can be invaluable in keeping your financial records in impeccable order and ensuring you take full advantage of the tax benefits available to you.

Clear View Business Solutions specializes in providing expert tax advice tailored to your unique financial situation. Contact us today to comply with tax laws and efficiently maximize your next tax return.