Are you taking all the tax breaks you’re entitled to? CPAs say you might be able to reduce your tax bill by taking advantage of the many exemptions, deductions, and credits built into the tax code. (Tax Preparation Help: Are You Getting All The Tax Breaks You Deserve?)
Tax exemptions, deductions, and credits are all things that can reduce how much you ultimately pay in taxes.
This is the last year you can claim many of these breaks. The tax changes passed into law late last year won’t affect your filing this year. So you’ll definitely want to take this one last chance to claim all the tax relief for which you’re eligible.
Exemptions are above-the-line deductions that allow you to reduce your overall income. The most common of these are personal tax exemptions that let you write off a certain amount per eligible person in your household.
Currently, taxpayers can claim a personal tax exemption of $4,050 apiece for themselves, their spouse (if married filing jointly), and dependent kids. While the standard deduction is being doubled for tax year 2018, personal exemptions are being eliminated.
Tax deductions: Above- vs. below-the-Line
Tax exemptions and deductions both reduce your amount of taxable income. It’s not a reduction of your tax liability, but it does reduce your taxable income.
If the amount of your tax deductions is high enough, you could lower your income enough to drop into a lower tax bracket, said Lisa Greene-Lewis, tax expert at TurboTax.
Tax deductions are either above- or below-the-line. Above-the-line versus below-the-line refers to deductions claimed before calculation of adjusted gross income and deductions claimed after calculation of adjusted gross income. Some examples of above-the-line deductions include IRA contributions and moving expenses.
If you itemize your taxes rather than taking the standard deduction (which about 30% of taxpayers do), you can take additional below-the-line deductions against expenses like your state and local income tax, mortgage interest, and charitable donations. They are all below-the-line deductions, Jaeger said.
Tax credits: Nonrefundable vs. refundable
Unlike exemptions and deductions, tax credits work a little differently. A credit reduces the taxes you owe, dollar for dollar. You can be eligible for credits even if you don’t itemize and just take the standard deduction.
Tax pros say people miss deductions and credits often because they don’t realize all of the tax breaks available to them. There are people that don’t file taxes that are definitely eligible for the EITC because it’s for lower to middle income. People may think they’re under the income filing threshold, but they could be be eligible for that credit and eligible for a refund for federal taxes taken out of their paycheck.
That’s because the EITC is what’s known as a refundable credit. Nonrefundable credits can knock your tax bill all the way down to zero. Refundable credits, as the name implies, can essentially have the government paying you.
The deadline when taxes are due in 2018 is Tuesday, April 17.
Call Williams & Kunkel CPA today in Flower Mound at 972-446-1040 to have a chat about your small business tax health.