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The basics of tax deductions, credits and refunds

Published 2016-10-11 in Credits and Deductions - 0 Comments
Tax Deductions

Tax filing is something that awaits us every year. Still, it can happen that we miss or forget something when the tax filing is due, especially when it comes to tax deductions and refunds. The law changes as well, so it can come in handy that we have a reminder what to do when the tax day comes.

When are taxes due?

First of all, you need to know when the taxes are due. It can easily happen that you forget, so set the reminder for April 15. This is the deadline for you to file the annual tax. In case you forget to respect the deadline, do not panic. Although you will pay some penalties, you can file the tax later, but do not wait too long. If you exceed the period of three years, you will lose the right on a refund.

Credits and deductions

When the time comes to file your tax, you need to pay attention to refundable credits, non-refundable credits and tax deductions. But, you need to know the difference between them above all.

Credits and deductionsTax deductions are there to reduce the amount of money that will be taxed. Deductions are applied to the amount of money you have made, and not the amount of tax. It is usually the sum you spent on expenses, especially those intended for producing additional income. For example, if you make 60,000 dollars a year and the deduction is 1,000 dollars, you will be taxed for 59,000 dollars.

When it comes to tax credits, they can be non-refundable and refundable. They do not reduce the amount of taxable money, but they do reduce the amount of tax you pay. Non-refundable tax credits decrease your tax bill and they are subtracted from the total amount of tax you owe. They can reduce the tax up to the full amount you owe, but not over that. This means that you may pay zero tax tanks to this credit, but you are not entitled to tax refund. Some common examples of non-refundable credits are: child or adoption tax credit, foreign tax credit and mortgage interest tax credit.

Tax refundsRefundable tax credits, on the other hand, can reduce your tax liability to the amount higher than you owe. This means that, if the amount of tax is smaller than the tax credit, you will get the difference in the form of tax refund. Refundable tax credits include additional child tax credit, health coverage, small business health care tax credit, and earned income tax credit.

Tax refunds

When your tax liability is lower than the amount of tax you need to pay, you are entitled to tax refund. This is usually the case when you have some of the refundable tax credits, so the amount of tax ends up being lower than the amount of credit. You are entitled to refund if you receive some of the refundable credits we stated above, and you need to file for a refund at the IRS.