We receive a lot of questions from our clients about whether or not they can write off certain items on their tax returns, such as education credits so they can get a bigger refund. Give the popularity of this question and since we are in the heart of tax season, the timing to address this is appropriate to clear up the difference between deductions and credits, and dive a bit deeper on refundable vs. non-refundable credits.
A “deduction” lowers your taxable income by the amount of that deduction, so your actual cash savings is the amount of the deduction times your tax rate. So if you’re in the 25% bracket and you get a $1,000 deduction, you save $250. A “credit” is a dollar for dollar reduction in tax. This means a $1,000 credit equals $1,000 cash in your pocket!
To add some more confusion to things, there are two types for credits: refundable and non-refundable. Refundable credits can take your tax liability down below zero and actually give you a refund above and beyond what you paid in. An example would be the Earned Income Credit.
A non-refundable credit, on the other hand, can bring your tax liability down to zero, but that’s where it stops! An example of this would be a solar installation credit.
We hope this brief explanation clears up a lot of confusion about how you can lower your tax bill or how you can get a larger tax refund. If you have specific questions regarding your tax return or have additional questions regarding tax credit and deductions, click here to speak to a tax professional at Potter & LaMarca.