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We all want to get every last one of our hard-earned dimes back from the IRS. Fortunately, working with TaxAct® means you don’t need a master’s degree in accounting to put the figures in your favor. Knowing how deductions and tax credits affect your situation puts you in a position to file confidently, and when it comes to taxes, confidence is key.
Tax Deductions Vs Credit
Get the scoop on big refund boosters
The difference between a credit and a deduction is commonly misunderstood. Many people use the terms interchangeably. Here’s what you need to know:
Deductions decrease your taxable income.
Your taxable income is the portion of your annual income that’s subject to federal and state taxes. Deductions help decrease that amount, making less of your income taxable. This reduces the amount of taxes you owe.
How a deduction affects your income varies based on the amount of the deduction and your tax bracket.
Let’s break that down:
- If your household happens to fall into the 24% tax bracket for 2020, a $1,000 deduction will net you a $240 reduction in your taxes owed.
- If you file single and earned between $39,476 and $84,200 for 2019 — putting you into the 22% bracket— then a $100 deduction would result in a savings of $22. (Psst… Those old clothes you’ll never wear again? Yep, that donation is a deduction.)
Tax Credits reduce your tax bill dollar for dollar.
Some of the more commonly claimed credits include:
- The Child and Dependent Care Tax Credit – While this particular credit does depend on your household income, many filers save up to $2,100 every year just for childcare-related expenses. If you’ve got even one child in daycare, you know just how much a credit like this can help ease the burden of that massive weekly bill.
- The Earned Income Tax Credit (EITC) – The EITC was originally established in 1975 to benefit working taxpayers, particularly those in the blue-collar sector. Today, individuals filing single or as head of household are eligible to receive a credit of up to $6,660. The credit amount depends on their income and the number of children they support.
It’s important to note that the tax credits above are specifically designed to help lower- and middle-income households prosper and save. If you don’t happen to know your tax bracket, we’ve got you covered.
The bottom line: We’re on your side.
Whether you’re a parent working your way through college, an entrepreneurial go-getter with your own business, or a nine-to-fiver climbing the corporate ladder — we’re here for you. TaxAct is designed to make the world of taxes more accessible and easier to understand, so you can file with confidence and keep more of your hard-earned money.