Claim Tax Credits and Deductions
When it’s time to file your taxes, a common question is whether you can claim both tax credits and tax deductions in the same year. The answer is a definite yes! Being able to use both can seriously cut your tax bill. Still, it helps to see how each one works and how they fit together so you can get the biggest benefit.
How Tax Deductions Work
Tax deductions lower the income you’ll pay taxes on. Let’s say you make $70,000 in a year and you claim $10,000 in deductions, your taxable income drops to $60,000. How much you save in taxes depends on your tax bracket. If you’re in the 22% deduction means you pay $220 less in taxes. Some common deductions are mortgage interest, medical costs, student loan interest, and donations to charity. You can either stick to the standard deduction or itemize your deductions, whichever is higher.
How Tax Credits Work
Tax credits reduce your tax bill, say you owe $3,000, and you get a $1,000 tax credit. Bam—now you owe only $2,000.
There are two kinds of credits: nonrefundable and refundable. Nonrefundable credits can wipe out your tax bill, but they stop at zero—no refunds for leftover credit. Refundable credits, on the other hand, can hand you cash back even if you owe nothing. Some of the most talked-about credits are the Child Tax Credit, the Earned Income Tax Credit (EITC), and education credits.
Claiming Both: How It Works
You can use both deductions and credits on your tax return, and they work in a one-two punch. First, deductions trim your taxable income, which cuts the base amount you’re taxed on. Then, credits hit the tax you owe and chop off even more. For example, let’s say your taxable income after deductions sits at $60,000, and the tax you owe is $6,000. Add a $1,000 tax credit on top, and you’re down to $5,000.
Maximizing Your Tax Savings
To get the biggest cut in your tax bill, use both deductions and credits together. Tax deductions shrink your total income, so you end up paying taxes on a smaller amount. Credits, on the other hand, knock a set amount off the taxes you owe. Keep careful records of anything that qualifies, and check IRS instructions or talk to a tax expert to make sure you get every dollar you deserve—without breaking any rules.
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