Most people probably only think about tax credits and deductions when they’re completing their tax return. However, a little early planning can make for a smoother filing process. By familiarizing themselves now, taxpayers can have a clear understanding of which credits and deductions make sense for them and the records needed to show their eligibility.
Here are a few facts about credits and deductions that can help with year-round tax planning.
A few things to know about deductions:
- Deductions can reduce the amount of a taxpayer’s income before they calculate the tax they owe.
- Most people take the standard deduction. The standard deduction is adjusted each year for inflation. The amount of the standard deduction depends on a taxpayer’s filing status, age, whether they’re blind, and whether the taxpayer is claimed as a dependent by someone else.
- Some people are required to itemize their deductions, and some people may choose to do so because it reduces their taxable income more than the standard deduction.
- As a general rule, if a taxpayer's itemized deductions are larger than their standard deduction, they should itemize.
- Taxpayers can use the Interactive Tax Assistant to see what expenses they may be able to itemize.
Things to know about tax credits:
- Taxpayers can subtract tax credits from the total amount of tax they owe.
- Some tax credits, like the earned income tax credit, are even refundable, which means a taxpayer could get a refund even if they don't owe any taxes.
- To claim a credit, taxpayers should keep records that show their eligibility for it. Properly claiming tax credits can reduce taxes owed and boost refunds.
- Taxpayers can check now to see if they qualify to claim any credits next year on their tax return.
Topic No. 501 Should I Itemize?