It’s never too early to prepare for a smooth tax filing process. Tax credits and deductions can have a significant effect on tax liability, so taxpayers can benefit by becoming familiar with the types of credits and deductions that make sense for their situation.
Here are a few facts about tax credits and deductions to help with tax planning:
Tax Credits
Tax credits are subtracted from the total amount of tax owed.
Claiming tax credits reduces taxes owed and can boost refunds.
It’s important to keep records to substantiate eligibility for any tax credits claimed.
Some tax credits, such as the earned income tax credit, are refundable and can be claimed by individuals with no federal tax liability.
Taxpayers can prepare now to see if they qualify for any credits on next year’s tax return and ensure they have the necessary documentation ready for the 2023 filing season.
Tax Deductions
Unlike tax credits, deductions reduce the amount of income before taxes are calculated.
The standard deduction, which most people take, is based on filing status, age, dependent status, and other factors. The standard deduction is adjusted each year for inflation.
While most taxpayers take the standard deduction, there are some tax situations that require itemized deductions. In other cases, taxpayers choose itemized deductions because they reduce taxable income more than the standard deduction.
If itemized deductions are larger than the standard deduction, it is typically best to itemize.
The Interactive Tax Assistant on the IRS website can help taxpayers determine which expenses may be able to be itemized.
Each situation is different, so it’s important to meet with a tax professional to determine the best approach for your tax needs.
If you have questions, contact HFM today. Our professionals are well versed on the latest issues to provide our clients with professional, personalized services.