Since tax codes change frequently, tax preparation presents new challenges nearly every year. Knowing the differences between options that let you save helps you hold on to as much income as possible. While exemptions ended in 2018, deductions and credits remain in use. Learn more about these terms in the guide below to take advantage of them when you file your return.

What Are Tax Deductions? 

These affect how much of your income is taxable, an amount that’s also influenced by your income bracket. They can be divided into two categories: 

• Standard Deductions: Reductions that are automatically removed from your taxable income when you fill out Form 1040. They depend on your filing status.  

• Itemized Deductions: Reductions based on charitable donations, medical bills, investments, home mortgages, and property taxes.

You can use either standard or itemized deductions during tax preparation, but not both.  

What Are Tax Credits? 

Even if you owe a certain amount of taxes based on your income bracket, expenses, and other factors, tax credits reduce what you have to pay. There are many different types of tax credits available, but these are especially common: 

• Earned Income Credit: Available to those with low annual income. The threshold depends on your dependents and filing status.

• Child Tax Credit: Reductions for each child under the age of 17 who’s your dependent.

• Child and Dependent Care Credit: Relevant if you pay for childcare or care for other dependents. 

• Adoption Credit: Covers the expenses of adopting a child during the same tax year. Income limits apply.

• Credit for the Elderly or Disabled: Available to low-income disabled individuals and seniors.

• American Opportunity Tax Credit and Lifetime Learning Credit: Compensates for expenses incurred while pursuing education. 

• Savers Credit: Applies to people who are contributing to an eligible retirement plan on a low or moderate income. 

• Advanced Premium Credit: Assists low-income taxpayers who have government health insurance.

Refundable credits that add up to a greater sum than your tax requirements are refunded according to the difference between that sum and what you paid. However, some credits are nonrefundable, meaning they won’t help you receive a refund. 

 
As seasoned experts in tax preparation, the accountants at Engelson & Associates ensure that you file your taxes accurately and take advantage of as many deductions and credits as possible. Based in Holmen, WI, and serving the Tri-State Area, they have over 100 years of combined experience providing reliable and thorough tax planning. They’re passionate about helping each client find greater success and prosperity through wise and efficient financial habits. Call (608) 526-3437 to schedule an appointment, or visit them online to learn more about their work.