“Nothing is certain except death and taxes.” To the dismay of many Americans, this well-known quote from Benjamin Franklin is still very accurate today. Every spring you find yourself confused, intimidated, and dreading a potential bill that drains your bank account.
It’s no secret that everyone wants to get the biggest refund they can using benefits like tax deductions and tax credits.
But messing up your taxes comes with big penalties that can carry fines or even jail time. We’re here to help! We’ve broken down these two common ways you can reduce your tax bill, as well as why you should trust a certified public accountant (CPA) to prepare your next return.
Deductions vs. Credits: Which Do I Want?
The good news? Both tax deductions and credits will ultimately decrease the amount you owe. The bad news? Understanding the differences between the two can be difficult. We’ve shared the key differences and some common examples below. Just keep in mind that CPAs will know the ins and outs of even the most complex situations.
Tax Credits
In an ideal world, you would prefer tax credits over deductions because this amount is simply subtracted from your overall payment to the IRS. In other words, tax bill – tax credit = new tax bill.
But there is an important caveat that the average taxpayer may not know. There are actually three different kinds of tax credits that can affect your potential refund in different ways. Thankfully, a CPA can help explain the difference in them all.
Refundable
If you’ve ever visited a clothing store, then you already have a good example of how refundable tax credits work. If you give the cashier more money than your items cost, they give you change.
That’s exactly how the IRS works in relation to refundable tax credits you are eligible for. No matter how much you overpay, they will refund the entire amount. That’s a simplified explanation, but a CPA can help you understand the details and figure out the exact amount of refundable credits available to you.
Non-refundable
Naturally, one can conclude non-refundable credits are basically the opposite. Let’s look at the clothing boutique example again. You can compare non-refundable credits to coupons. Sure, your store coupon may bring your grand total to zero, but the store isn’t going to give you any leftover funds from the coupon that you didn’t get to take advantage of.
In other words, these credits can be subtracted from your final amount owed, but only until you don’t owe the government anything. After that point, any remaining credits disappear and sadly don’t go towards a refund for you. Of course you are happy to lessen your liability, but it would also be nice to get some money back!
Partially Refundable
Partially refundable credits fall in the middle of the first two categories. Let’s return to the clothing store example. With a straightforward refundable tax credit like we discussed above, you would get the full amount of change with no questions asked. If a credit is partially refundable, however, then you would only get a portion of that change back.
To add to the confusion, not all credits are calculated the same. This means the percentage that you get back could be a different amount depending on the type of credit. For example, the boutique might only refund you 10% of the money you overpaid on pants, but will refund you 50% of the money you overpaid on shirts.
Are you completely lost yet? You’re not alone, which is yet another reason to reach out to our expert CPAs for assistance!
Examples of tax credits include:
● Child Tax Credit
● Dependent Care Credit
● Adoption Credit
● American Opportunity Credit
Tax Deductions
Tax deductions, on the other hand, reduce your liability on the front end by lessening your total income reported to the IRS. Employee contributions to retirement are great examples. Every dollar you deposited throughout the year can then be subtracted from the amount of money you made. So, how does this help? The less money the IRS thinks you made, the less you owe.
Obviously tax deductions can be tricky to understand, but it gets worse. Some taxpayers may benefit from itemizing their deductions. But what does that even mean?
Standard vs Itemized Deductions
For a majority of Americans, it makes sense to just take the standard deduction offered and run. But some individuals may have a better outcome by itemizing their deductions.
The catch? The IRS requires detailed documentation for itemized deductions. Taxpayers taking this route would greatly benefit from CPA assistance to avoid costly mistakes.
Examples of tax deductions include:
● 401k contributions
● Charitable contributions
● Mortgage interest
● Health Savings Account (HSA) contributions
Does that all sound incredibly confusing? It can be! Read on to figure out why you should let a professional CPA handle your tax preparation.
Why Trust a CPA
CPAs know the ins and outs of the tax code and have worked with individuals in all income brackets. This experience means they can differentiate between all of the types of deductions and credits you are eligible for in order to maximize your benefits. Heft refund anyone?
It also means that hiring a professional will save you a ton of time. Who has hours to exhaustively research the IRS website? In many instances, you can even drop off your documentation and pick it up a few days later without any sweat on your part.
A CPA also serves as a great safety net in the event of an audit. When the IRS is involved, everyone knows the rules and regulations are nonnegotiable. Even if completely accidental, taxpayers can get in a lot of hot water if they mistakenly calculate the amount they owe. A trusted accounting professional will avoid all mistakes to begin with, and back you up in the event of a review.
The Best in Tax and Accounting Services
Let Tax Avenger in Canton take the stress and worry out of tax preparation and planning so that you can feel confident in your tax deductions and credits. We provide full-service tax preparation, tax planning, small business accounting, bookkeeping services and more. Everything can be done remotely, a convenient way to stay on track. Call and speak to