Deductions and credits can reduce taxable income from "summary" of Income Tax Fundamentals 2021 by Gerald E. Whittenburg,Martha Altus-Buller,Steven Gill
When preparing your tax return, it is important to understand the impact of deductions and credits on your taxable income. Deductions and credits can significantly reduce the amount of income that is subject to taxation, ultimately lowering your overall tax liability. Deductions are expenses that you can subtract from your total income, resulting in a lower taxable income. Common deductions include expenses for education, healthcare, home mortgage interest, and charitable contributions. By deducting these expenses from your income, you are able to reduce the amount of income that is subject to taxation, ultimately lowering your tax bill. Credits, on the other hand, are even more valuable than deductions because they directly reduce the amount of tax you owe, dollar for dollar. There are two types of credits: nonrefundable credits and refundable credits. Nonrefundable credits can reduce your tax liability to zero but cannot result in a refund. Refundable credits, on the other hand, can not only reduce your tax liability to zero but can also result in a refund if the credit amount exceeds the amount of tax owed. By taking advantage of deductions and credits, you can significantly reduce your taxable income and overall tax liability. It is important to carefully review all available deductions and credits to ensure that you are maximizing your tax savings. Additionally, it is essential to keep accurate records and documentation of your expenses in order to support your claims for deductions and credits.- Deductions and credits play a crucial role in reducing taxable income and minimizing your tax liability. By understanding how deductions and credits work and taking advantage of all available opportunities, you can effectively lower your tax bill and keep more of your hard-earned money.
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