To be brutally honest, all of us want to save as much money as we possibly can on our taxes. There is nothing pleasurable and exciting than to be able to save money on your hard-earned business revenue, your salary and hard-working individuals. It can indeed be a big win! While it is true that most people straight-up think about tax deductions as one of the best methods of minimizing your tax load, there is a secret that can help you even save more money on your tax payments – and that is tax credits. What is even better than that is the fact that you can leverage both tax deductions and tax credits to save on tax payments – keep this in mind for the coming tax year.
Tax Credits and Tax Deductions – Some Differences You Should Understand
When it comes down the very bone of the matter, the difference between both tax payments is not that difficult to understand – it all boils down to the method of calculating your use, which is what is going determine your savings.
Tax deductions basically minimize the total amount taxable on your income. That specific value is calculated by first taking out the tax liability. However, it is still mandatory for you to pay your taxes on the amount remaining. That means the total value of your tax deductions cannot be translated into your savings. For example, a deduction totaling $5,000 will only save you $1,100 (on which you still owe taxes), and you to save this much, you have to be in the 22% tax bracket – so no this does not seem as exciting as it could be.
On the other hand, tax credits minimize your total tax liability. After deducting all your taxes and doing all your calculations, you can deduct the total amount of tax credits from the tax bill. This means you will be able to save an amount of money in tax credit as the credit is worth (but there are still some limitations to this). So for example, tax credits amounting to $5,000 basically means you will have to pay less in taxes – which is $5,000!
Moreover, here is a chart to help you understand how tax credits on dollar for dollar will provide you with more tax saving compared to tax deductions. However, combining both these factors can give you a powerful leverage to save on tax payments!
|Table for Tax Deductions and Tax Credits|
|Tax Deduction||Tax Credit||Both|
|Adjusted Gross Income||$55,000||$55,000||$55,000|
|Final Tax Due||$11,000||$7,100||$6,000|
Small Business Owner? Here is How You Can Benefit from Tax Deductions
Sure, tax deductions is ‘the’ staple of saving on your tax payments, there are a lot of factors that are tax deductible, especially when it comes to running a small business. For example, the incurred expenses such as developing your business or running or maintaining your business – these are all tax deductible, which means you can deduct the total amount of expenses of these factors from the total amount of tax payable from your income and save on tax payments.
Moreover, it is important to ensure that you monitor and track each expense carefully, categorizing each expense, and don’t forget to safely store your receipts, which is going to help make your audit easier. You can keep digital and physical receipts.
Moving on, another important factor to understand is that you are going to have to familiarize yourself with different business elements that are tax deductible in order to ensure you take full benefits of these critical savings on your income. If you don’t understand the jargon, you could always discuss things with your accountant.
Advantages of Tax Credits for Small Business Owners
As explained earlier, tax credits are in some cases even more powerful than tax deductions in terms of savings on your tax payments. But surprisingly not many small business owners are able to take full advantage of tax credits. The primary reason why this is true is the fact that not many people really know what tax credits are and how they can be incorporated in a business. But that isn’t your fault either. That is because there are not many tax credits you can use, and the ones that are out there apply to particular scenarios, or have plenty of strings attached. That is why it is vital to refer to your accountant to first understand whether or not you are eligible for a tax credit before you claim it. However, there are some interesting tax credit systems that small business owners can use such as:
Tax Credit On Earned Income
This offers a reduction on tax for working individuals who have low to moderate earnings and income. However, the income tax cap differs in terms of the number of children those individuals have and their marital status. So if you are single, the adjusted gross tax on your income could range to $15,270. But if you are married and have children (and are filing for your taxes together in 2019), the gross tax on your income could range to $54,884. If you are just starting your business, refer to the 1040 Form. And if you have children and are starting a business, be sure to fill the Schedule EIC Form and attach it with your 1040.
Work Opportunity Tax Credit
If you have hired employees as part of your operations, you could take advantage of the work opportunity tax credit. This could potentially provide you with a good tax break, especially if the people you have hired have had a tough time landing jobs. The category of people that can fall in this bracket can range from veterans, ex-convicts to people with disabilities, etc.
Tax deductions provide you a tax break by minimizing your taxable income. Tax credits on the other hand, minimize the amount of money that you actually owe in taxes (dollar for dollar). Sure, tax deductions are more commonly applied for savings on tax payments, but you could leverage tax credits and combine it with tax deductions to save more money.
If you’d like to learn more about tax laws and your business, we at Akif CPA are here to help. Learn about our services here.
Do you have unique issues or concerns not discussed in this blog then please contact us by email or phone. We are here to help.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Akif CPA will not be held liable for any problems that arise from the usage of the information provided on this page.