A common question our Cedar City accountant is asked during tax season is whether tax credits or tax credits are better when it comes to improving your tax return. The answer is—it depends.
Difference Between Tax Credits vs. Tax Deductions
To help you determine whether tax credits or tax deductions are better, it is important you understand how they work. Both tax credits and tax deductions will work to help you save on your taxes, but they do it in different ways.
Tax credits – When you use a tax credit, it can reduce the amount of taxes you owe at a dollar-for-dollar rate reduction. So, say you owe $2,500 in taxes, a $1,000 tax credit will reduce that amount down to $1,500 owed. Also, some tax credits are refundable, so if you have enough tax credits to reduce your taxes below zero, you can have the remaining amount refunded to you. However, many tax credits are non-refundable, so you can only reduce your taxes owed to zero.
Tax deductions – On the other side, a tax reduction work to reduce the taxes you own by percentages. So, say you are in the 22% tax bracket and have a $1,000 tax deduction you can apply. For those in the 22% tax bracket, the $1,000 tax deduction actually will only save you $220 on the taxes you owe.
In some instances, you can use both tax credits and tax deductions on your tax return, though many are dependent on a variety of factors. Our accountant provides tax preparations services and can help you determine what combination will apply to your taxes.
How The Tax Cuts And Jobs Act Affect Tax Credits vs. Tax Deductions
The sweeping changes to the tax law by the Tax Cuts and Job Act passed in 2017 will now affect tax returns filed in 2019. One of the biggest changes is the raising of the standard deduction, which is now:
- Single filer – $12,000
- Married, filing jointly – $24,000
- Married, filing separately – $12,000
- Head of household – $18,000
With the higher standard deduction, most will not bother with itemized deductions, making tax deductions less useful than tax credits. However, if you want to discover if itemization is worth it for you or if the standard deduction is best, our accounting services are available to you.
To work with an experienced tax accountant, contact us for an appointment. Our accountant will help you receive the best tax refund possible.