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Tomato – Taomato ? Nope, not here. I always hear folks using these terms interchangeably. However, tax credits and tax deductions have two completely different meanings. Both are great and can definitely help reduce tax but in different ways.
Reduces your taxable income. There are two types of deductions –> the standard deduction or itemized deductions. Check out my full guide – to see if you should itemize your deductions or take the standard deduction.
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Reduces your tax liability (the amount you owe). There are several tax credits available to qualifying taxpayers. For example check out all the changes to the Child Tax Credit. There are also credits available for childcare, adoption, low income and college expenses.
Check out this full list from the IRS of available tax credits.
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Refundable v. Nonrefundable
Refundable -> means if the tax credit reduces your tax liability to a negative amount you can receive a refund. Yeah!
Nonrefundable -> means if the tax credit reduces your tax liability to a negative amount you do not receive a refund. So you may not get the full value of the credit if your tax liability is not high enough. Boo!
Click here to use TurboTax Calculators and Tools. Estimate your refund and more.
That’s it. Pretty easy peasy right?!
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I’d love to help you get a better understanding of other tax terminology -> grab a free copy of my tax cheat sheets!