Do you know the difference between tax deductions and tax credits? Pure’s Financial Planner, Peter Stokes, CFP®, AIF® discusses how both options can cut down your tax bill, but in different ways. Tax deductions work to reduce taxable income, while tax credits directly impact the taxes that you owe.
Learn more about:
- Tax credits for individuals vs. S corporations
- Tax deductions for individuals vs. S corporations
FREE GUIDE | End of Year Tax Strategies
Tax deductions and tax credits are both ways to reduce your tax bill, but they work very differently. Tax deductions reduce your taxable income, while tax credits directly reduce the amount of tax that you owe. For example, if you have a $1,000 tax deduction and you’re in the 22% tax bracket, you will save $220 on your taxes. If you have a $1,000 tax credit, you will save the full $1,000 on your taxes.
There are many tax credits available to individuals and businesses, but the ones that you can take advantage of by the end of the year depend on your specific situation. Some common tax credits for individuals include the earned income tax credit, child tax credit, education credits. Also, certain electric vehicles, energy efficient home improvements and solar panels. For S corporations, common credits include the research and development credits and the work opportunity credit.
It’s important to note that not all tax credits are refundable. Refundable credits can result in a refund check if the credit exceeds your tax liability. Nonrefundable credits can only reduce your tax liability to zero.
Tax deductions are a way to reduce your taxable income, which in turn reduces the amount of tax you owe. Deductions are available to both individuals and S corporations.
For individuals, some common tax deductions include: charitable donations, mortgage interest, state and local taxes and medical expenses.
For S corporations, some common tax deductions include: salaries and wages, employee benefits, rent and lease payments, business travel expenses.
As for the timing of donations, you must donate before the end of the tax year to claim a deduction for that year.
Please note that this is not an exhaustive list of tax deductions available to individuals or S corporations. Tax laws are complex and are subject to change, so it’s always a good idea to consult with a tax professional for guidance on your specific situation. So, take advantage of our free tax analysis to see if you keep more of what you earn.
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• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.
AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.