Understanding tax deductions and credits can help you reduce your tax liability and maximize your refund. Here’s a brief overview of each:
Tax Deductions: A tax deduction is an expense that can be subtracted from your taxable income, reducing the amount of income that is subject to tax. There are two types of deductions: standard deductions and itemized deductions.
- Standard Deduction: This is a set amount that is subtracted from your taxable income based on your filing status. For tax year 2022, the standard deduction amounts are:
- Single filers and married filing separately: $12,950
- Married filing jointly and qualifying widow(er): $25,900
- Head of household: $19,400
- Itemized Deductions: These are expenses that you can deduct if they exceed the standard deduction. Common itemized deductions include charitable donations, medical expenses, state and local taxes, and mortgage interest.
Tax Credits: A tax credit is a dollar-for-dollar reduction in the amount of tax you owe. There are two types of tax credits: refundable and non-refundable.
- Refundable Tax Credits: These credits can reduce your tax liability below zero, which means you can receive a refund for any excess credit amount. Examples of refundable tax credits include the earned income tax credit and the child tax credit.
- Non-Refundable Tax Credits: These credits can reduce your tax liability to zero, but any excess credit amount cannot be refunded to you. Examples of non-refundable tax credits include the child and dependent care credit and the education tax credits.
By understanding tax deductions and credits, you can identify opportunities to reduce your tax liability and maximize your refund. For personalized tax advice and guidance, contact Jose’s Tax Service to schedule a consultation with one of our experienced tax professionals.
