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Tax Tip Tuesday: Reviewing Tax Credits and Deductions Helps Set Taxpayers Up for Success at Tax Time

Tax season is upon us, and taxpayers might be confronted with copious amounts of tax jargon. Two tax breaks that stand out among the vernacular are credits and deductions. Each lowers overall tax liability, the total annual tax owed on earned income. Therefore, educating yourself about these tax breaks can make for a smoother filing process.

Here are a few beneficial facts about credits and deductions that will help with year-round tax planning.

Claiming Tax Credits

A credit offers a dollar-for-dollar reduction of your taxes and is generally more valuable than deductions. It has the same dollar value for any taxpayer claiming it. Properly claiming credits can reduce taxes owed and boost refunds.

Most credits are nonrefundable, such as the child and dependent care credit. These do not reduce a filer’s liability below zero. Other credits are refundable, such as the earned income tax credit. Therefore, you could receive a refund even if you do not owe taxes.

To receive a credit on your return, you should keep records that show your eligibility.

Choosing Standard Deductions or Itemized Deductions

Deductions can reduce the amount of income subject to tax. Therefore, it is a more indirect way of cutting your taxes relative to tax credits, which can lower your actual tax liability. Because of its interplay with taxable income, deductions are more valuable to higher earners.

Most taxpayers typically receive the standard deduction. The amount depends on your filing status, age, and other contributing factors. In 2022, the standard deduction was $12,950 for single filers and $25,900 for married couples filing jointly.

Some taxpayers are required to itemize their deductions, while others may choose to do so because it reduces taxable income more than the standard deduction. You should itemize deductions such as charitable donations, mortgage interest, state and local taxes, and certain medical and dental expenses if the value surpasses the standard deduction amount.

Itemized deductions are known as “below-the-line” deductions. You can claim these only if you opt to itemize deductions on your tax return. There are also “above-the-line” deductions. Eligible taxpayers can claim these regardless of whether they itemize or receive the standard deduction. Examples include deductions for contributions to traditional individual retirement accounts or interest paid on student loans.

Use the Interactive Tax Assistant to see what expenses you can itemize.

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