Harris: Tax Credits and Deductions Explained

By Charlestien Harris

It is the middle of tax season, and you still have time to research which tax credits and deductions you are eligible for. The tax deadline of April 15 is fast approaching, so being informed about your choices can benefit you if you know what options you have and whether you can apply the deductions or credits to your tax return. Tax breaks make it easier to cover the cost of everything from childcare to retirement to higher education, but only if you take full advantage of the credits and deductions available to you. 

Tax credits and deductions are different options, though both can reduce the amount of tax you owe. Let’s dive into a deeper understanding of the difference between the two.

Tax Credits: A tax credit provides a dollar-for-dollar reduction of your income tax liability. Tax credits can be refundable or non-refundable. While a tax refund simply represents the difference between the taxes you paid versus the taxes you actually owe, a tax credit is a benefit that directly reduces your tax burden. Some examples of each are listed below:

Non-refundable:

• Childcare Credit
• Lifetime Learning Credit
• Credit for Other Dependents
• Child Tax Credit
• Residential Energy Credit
• Adoption Credit
• Retirement Savings Credit
• American Opportunity Credit
• Elderly and Disabled Credit
• Premium Tax Credit

Refundable:

• First-Time Home Buyers Credit
• Child and Dependent Care Credit
• Qualified Sick and Family Leave
• Earned Income Tax Credit
• Additional Child Tax Credit

Tax Deductions: A tax deduction reduces the amount of your income that is subject to taxation. By lowering your income, deductions lower your tax. You need documents to show expenses or losses you want to deduct. There are two types of deductions: standard and itemized. United States tax law states that the standard deduction is a dollar amount that non-itemizers may subtract from their income before income tax is applied. Taxpayers may choose either itemized deductions or the standard deduction, but usually choose whichever results in the lesser amount of tax they have to pay. Some examples of itemized deductions are listed below:

Itemized deductions:

• Mortgage interest
• State and local income taxes
• Medical or dental expenses
• Charitable donations
• Unreimbursed medical and dental expenses
• Long-term care premiums
• Casualty and theft loss
• Gambling losses equal to or less than gambling winnings

Choosing Between Standard or Itemized Deductions: This is a very important decision to consider when you file your tax return. When you file your federal taxes, you have to choose between claiming the standard deduction or itemized deductions. While the itemized deduction could potentially allow you to save more on taxes, your itemized expenses must exceed the standard deduction. If you’re not sure which deduction to take, here’s what you need to know about these two options. Claiming the Standard Deduction is certainly easier, but to itemize, you need to keep track of what you spent during the year on deductible expenses. Some itemized deductions are listed above, but there are some items that are not allowed as deductions, and they are:

• Credit card interest
• Personal meals, travel, or entertainment
• Union dues
• Investment fees
• Hobby expenses
• Tax preparation fees
• Fees to dispute the IRS

Knowing which tax credits you may qualify for can mean the difference between owing a tax bill or receiving a tax refund from the Internal Revenue Service. Deductions that are allowed or not allowed are just as important to know. As a VITA volunteer, I get various questions about what can and can’t be used as an itemized deduction when filing taxes. The information provided in this article is for educational purposes only. If you need more detailed assistance, you should visit a tax professional.

For more information on this and other financial topics, you can email me at Charlestien.Harris@banksouthern.com or call me at 662-624-5776. 

Until next week – stay financially fit!

Charlestien Harris is our financial contributor, a financial expert with Southern Bancorp Community Partners whose articles are seen in a number of publications around the region.