August 5, 2020
Tax credits and tax deductions: Different, but rowing in the same direction

Tax credits and tax deductions have unique factors at play. Your accountant can guide you into the best scenario for your company.

A tax break is a tax break, right?

Tax credits and tax deductions are both attractive in that they save us money when filing taxes. Both have that advantage in common. No doubt about it. Any money we can legitimately keep when it comes to the Internal Revenue Service is a good thing.

However, credits and deductions are different, each with their own rules and requirements. So it pays to get familiar with how they vary and what each entails, with a qualified accountant by your side to ensure that the tax break or breaks you choose are what are best for you and your business.

Psst … Tax credits are better

Tax credits are better than tax deductions because of how they are subtracted from your gross income.

Let’s say you owe the IRS $10,000 in taxes. But you have tax credits of $5,000. That $5,000 comes off your tax debt and would mean you only owe $5,000 to the IRS, not $10,000.

Deductions, on the other hand, are subtracted from your gross income.

So if you earned $80,000 last year and are claiming $10,000 in deductions, it would just mean you’d be taxed on $70,000 — $80,000 minus the $10K — which is good. Just not as good as tax credits, which are subtracted dollar for dollar from your tax amount that’s due.

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Not all credits are equal

Another reason that businesses need an experienced accountant as part of their team is to guide them in what tax credits are best. There are refundable and non-refundable tax credits.

Refundable tax credits mean you can get a refund for a tax credit from the IRS. So if you have a $2,000 tax credit but only owe the IRS $1,000, you’d get the other $1,000 in a refund check from the IRS. It’s kind of like when retailers used to offer money back if you presented a money-off coupon that was worth more than the price of the item.

There are not as many refundable tax credits out there as there are non-refundable tax credits, however.

Non-refundable tax credits mean you can wipe out taxes owed to the IRS, but should forget about any overage being mailed to you. If you owe $1,000 to the IRS and have a $2,000 tax credit, you just get the debt wiped out, not the extra $1,000 mailed to you as well.

These definitions of tax credits, tax deductions and the types of tax credits are the very basic explanations of what is available and how they impact potential tax savings. To learn the best route for your business in terms of credits, deductions or a combination of both, it’s best to rely on your accountant’s advice.

Both tax credits and tax deductions save you money. It’s important to know how both work to your company’s benefit and ensure your accountant answers your questions clearly, regularly reviews your company’s tax-saving strategies and looks out for your best interest every step of the way.

Kari Kerby

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