Do you hear tax terms get thrown around without really understanding what they mean? It’s common for people to confuse a tax credit with a tax deduction. Many people use the two interchangeably when, in reality, they are two different things.
Let’s set the record straight and go through what makes something a tax credit versus a tax deduction so you can understand how to lower your tax bill.
Looking to qualify for more tax credits or claim more deductions on your tax return? Gordon Law can help. When you use Gordon Law to prepare your tax returns, we review your situation to ensure you benefit from all the tax savings you are eligible for.
What is a Tax Deduction?
A tax deduction lowers your tax liability indirectly by reducing your taxable income.
On your tax return, you first total up all of your income for the year. You then use tax deductions to lower this amount before calculating your tax owed.
The key to remembering tax deductions is that they come before tax is calculated.
What Are Common Tax Deductions?
Typically, when people think of tax deductions, they think of either itemized deductions or the standard deduction.
Itemized deductions are the amounts reported on Schedule A, including mortgage interest, charitable donations, unreimbursed medical expenses, state and local income tax, and real estate taxes.
If you don’t itemize your deductions, you may take the standard deduction, which is just a set amount based on your filing status. For tax year 2024, the standard deduction for single taxpayers (or married filing separately) is $14,600. For 2025, it’s $15,000.
Besides these two, other common deductions include:
- Qualified Business Income (QBI) deduction available to self-employed individuals
- Student loan interest deduction for those repaying interest on student loans
- Educator expense deduction for teachers with unreimbursed professional expenses
- Business expenses that can be deducted from self-employment income
What is a Tax Credit?
A tax credit is a dollar-for-dollar amount deducted from your overall tax liability. This means the tax credit is subtracted after all your income is totaled, deductions are considered, and the tax on your income is calculated.
What Are Common Tax Credits?
Some popular tax credits include the child tax credit, energy tax credits, and education credits.
Credits typically have specific qualifications and income thresholds you must meet in order to claim them. For example, the child tax credit is not available to everyone with children. Among other things, your kids must meet the age requirements, spend a certain amount of time with you, and rely on you for the majority of their support. Even if your children meet all the qualifications, you won’t be able to claim this credit if you surpass your income threshold.
Can You Get Money Back From Tax Credits?
The short answer is yes: It is possible to get money back from the government from certain tax credits.
- Refundable tax credits mean the government will give you money if your tax liability is less than the tax credit you can claim. So, if your tax liability is $1,000 and you qualify for a $2,000 refundable tax credit, the government will send you $1,000.
- On the other hand, you do not get any money back from nonrefundable tax credits, even if you qualify and your tax liability is less than the credit amount.
Want to Make Sure You Claim All Your Deductions and Credits?
Tax deductions and tax credits can help save you money when it comes time to file your tax return. You want to make sure you qualify and report them correctly to ensure you don’t run into any problems with the taxing authorities.
When Gordon Law prepares your tax return, we analyze your specific situation to make sure you claim every deduction and credit you can so you don’t leave any money on the table. Reach out to us today so we can get started on your tax return!
