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Use tax credits and deductions to lower your taxable income from "summary" of The Tax and Legal Playbook by Mark J. Kohler
Tax credits and deductions are powerful tools that can help you reduce your taxable income and ultimately lower your tax bill. Tax credits directly reduce the amount of tax you owe, while deductions reduce the amount of your income that is subject to tax. There are two types of tax credits - refundable and non-refundable. Refundable tax credits can actually result in a refund if the credit exceeds the amount of tax owed. Non-refundable tax credits can only reduce your tax liability to zero. Some common tax credits include the Child Tax Credit, Earned Income Tax Credit, and American Opportunity Credit. Deductions, on the other hand, can help lower your taxable income by subtracting certain expenses from your total income. There are two types of deductions - above-the-line and below-the-line. Above-the-line deductions are subtracted from your gross income to arrive at your adjusted gross income (AGI), while below-the-line deductions are taken after your AGI is calculated. Some popular deductions include the standard deduction, mortgage interest deduction, and charitable contributions. By taking advantage of these deductions, you can effectively reduce the amount of income that is subject to tax, resulting in a lower tax bill. It's important to note that tax credits and deductions are subject to certain limitations and phase-out thresholds based on your income level. Additionally, some credits and deductions may require you to meet specific criteria or provide documentation to qualify. By understanding how tax credits and deductions work and strategically utilizing them, you can potentially save a significant amount of money on your taxes each year. Be sure to consult with a tax professional to determine which credits and deductions you may be eligible for and how to maximize their benefits.
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