Maximize Your Savings: Know The Differences Between Tax Deductions And Credits

Tax season has started and the Internal Revenue Service is processing 2022 tax returns. Filers have until April 18 to file and most expect a refund, according to IRS on April 18, 2022. Taxpayers should take advantage of available deductions and credits to potentially save thousands. It’s worth noting that although the terms “deductions” and “credits” are often used interchangeably, they are in fact distinct from one another.

Tax deductions and tax credits are important for reducing taxable income and tax owed. Tax deductions reduce taxable income while tax credits directly reduce tax owed. Examples of tax deductions include expenses for charity work and tax credits include the credit for purchasing an electric or fuel cell vehicle. In 2023, the credit for purchasing a new electric or fuel cell vehicle can be worth up to $7,500.

The standard deduction threshold is the portion of your income that is not taxed, calculated by subtracting the standard deduction from your total, as stated in an article published by Investopedia on December 29, 2022. The IRS adjusts the standard deduction annually to keep up with inflation and increased it significantly in 2022 due to inflation: Single: $13,850, Head of Household: $20,800, and Married Filing Jointly: $27,700. No documentation is needed for the standard deduction, simply claim it in your tax return.

Tax credits are considered better than deductions as they reduce your tax by a set dollar amount, rather than just lowering the taxable amount like deductions. Additionally, if a credit is larger than the amount of tax you owe, you may receive a tax refund.