Reviewing tax credits and deductions now helps set taxpayers up for success at tax time
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?