Tax Deductions

62_tax-deductions-vs-tax-credits_421x236The old saying goes the devil is in the details. There is no truer place than where money is concerned. The reason is simple: whoever made the game and plays the game is probably going to win. While the Internal Revenue Service is not necessarily into “winning”, they do have some details that are worth knowing about income taxes.

They are not necessarily into pulling the wool over taxpayer’s eyes. Though, most people do not speak “accounting”, and so some of the terms just get lost in the part of the brain that drops any scary money words into the depths of the “tax” bucket in the crevasses of the brain.

The first is the difference between tax credits and tax deductions. Many people use them interchangeably, but they are not one in the same. True, both can cut your tax bill, they refer to where they take place in the process of tax preparation.

How Come That Rich Guy Pays The Same Taxes You Pay?
This is where deductions factor into the game. Tax deductions reduce the taxable income. Common tax deductions might include home office deduction.

Say that you work 9 to 5, five days a week. Then your employer is paying to keep the lights on, to supply air-conditioning and/or heating, paying rent, supplying pens, paper, Internet and phone access, business insurance, computers, and that cranky and unruly photocopier. They pay a lot in overhead to operate an office, in other words.

The office is a tax deduction. In exchange for working, you may receive perks such as free coffee, fresh spring water, and a nice cafeteria that is subsidized by your employer. You guessed it, those might be deductions for your employer as well.

If your wife, on the other hand, works for herself, then she probably has taken over some portion of the home for her home office. She qualifies for a home office deduction. It must be a place that is used solely for her work.

Yet for you, if you were to file your taxes separately it would seem like you are paying nearly double in taxes. She is self-employed and paying something hovering near 20%, and you are paying 40%. Surely there has to be a saving grace for you.

Tax Credits
Let’s say that you are environmentally friendly and are proudly a tree hugger. You have a home that you are busily fitting for every new high-energy efficiency product you can find. Now we are talking.

You are onto your piece of the tax relief pie here. While you may owe a higher percentage than your wife, if you were filing separately, you have some relief. It is in the form of tax credits.

Say you live in a state that is as energy efficient conscious as you are, and they are offering credits for driving the greenest cars on the market. Ch-aching. You may find yourself with a few thousand dollars off your tax bill.

Then factor in all the credits from the EPA for buying all those Energy STAR appliances, windows, and installing a solar heating system on your home. You guessed it, you are in tax credit land now. Look for child tax credits, depending upon the tax bracket you are in with your wife.

Tax deductions and tax credits are good to be aware of because they take some of the bite out of tax time. Deductions take that income down a bit while the tax credit slashes the amount that you owe to the Federal government. The same thinking applies for state and local taxes too.

Charitable-tax-deduction-formOverlooked tax deductions don’t do consumers any justice, resulting in either less of a tax refund owed to them or a larger tax bill owed by them to the IRS. The government won’t stop you from handing them more money. They will only stop you when you try to get away with not paying enough taxes. Don’t let that scare you out of getting the money that is owed to you.

You work hard, and you pay your taxes. Perhaps you’ve overlooked deductions because you didn’t quite fully understand them. Or, maybe you’ve overlooked them because you’re not sure if they apply to you. Maybe you’ve overlooked deductions because you simply just don’t know they are out there to claim. No matter the reason, it’s time to get all the tax deductions owed to you.

Did you know that you can claim medical expenses on your taxes? The way this works is that you get to claim anything over 7.5 percent of your total income. Remember when you come up with this number, it’s the adjusted gross income that you use. What is covered? Imagine getting all your mileage covered for driving to those doctor’s appointments.

Those deductions can start adding up, and they can make a significant impact or your tax return or the amount of tax you owe annually. If you’re thinking that you aren’t getting all the deductions owed to you, maybe it’s time to have a professional do your taxes. Sure, you have to pay the tax professional, but if what you get back in deductions exceeds what you pay the tax professional, then you’re a winner.

Charity work is something else to look at while you’re totaling up those deductions. Most people that do charity work know that the actual work itself can’t be claimed. However, what are your personal expenses for the charity, and what is your mileage? Again, you’re totaling up that mileage and getting reimbursed.

As you can see, it makes sense to know these deductions ahead of time so that you can track them throughout the year. You’ll learn more about tax deductions as the year goes by, so make sure you keep meticulous records about everything. That doesn’t mean you have to live, eat and breathe taxes, but you just need to be sure that you pay attention to your expenses. Are they tax deductions? If you’re not sure, save the receipts anyway. Calculate your mileage for things that you do in case you can claim that mileage on your taxes. As you can see, sometimes you can!

There are more tax credits to homeowners than you might think. Yes, you can claim your mortgage interest, but did you know there is simply a home buyer tax credit? This not only applies to people who buy their first home, but it applies to people buying a home in general. The one for first time home buyers is more than the one for general home buyers, but either one is still a whopping tax credit.

Remember that you’re looking for your total deductions to exceed two percent. Why? This is what allows you to itemize your deductions, and you’d be surprised to find out that new types of deductions are always made available. You might have thought you were claiming everything, but all the sudden you find out there are more to claim. Once you get over that two percent threshold, the itemization of your taxes is going to really start paying off, and you’re going to wish you had done this much sooner.