The last quarter of the year is upon us, and that means it’s time to think about end-of-year tax planning. Income tax deductions and credits both reduce your tax bill, but it in different ways. Knowing the difference between deductions versus credits can help you maximize your savings.
Tax deductions: These are specific expenses you’ve incurred (e.g. health insurance, business charges, charitable gifts) that you can subtract from your income before calculating your taxes. Depending on your situation, it may be more beneficial to take a standard deduction than to itemize your expenses. Talk with your financial planner or tax advisor if you’re not sure.
Tax credits: These give you a dollar-for-dollar reduction in your tax bill. That means a tax credit valued at $1,000 actually lowers your tax bill by $1,000. A few examples include education, energy and dependent care credits. Next month, we’ll go into more detail about specific tax credits that may be available to you.