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Tax Showdown: Credit vs Deduction
Tax Showdown: Credit vs Deduction
We’re all looking to save an extra penny whenever we can, but it can seem too complicated to save anything when it comes to the Internal Revenue Service and taxes. It turns out there are ways to save on taxes, and some of the most important ones are taking a tax deduction and claiming tax credits.
Freelancers, gig workers and all self-employed people can claim tax deductions for things like business meals, home office supplies and even cell phone expenses. You also might be eligible for some tax credits, which will lower your tax bill if you qualify. As with anything IRS-related, there are certain requirements one needs to fulfill. Using tax credits or taking a tax deduction when you don’t qualify could result in some hefty IRS penalties.
But no need to worry. You’ll learn everything you need to know about the difference between tax credit and tax deduction and be the winner in the credit vs deduction showdown.
Table of contents
What is a tax deduction?
A tax deduction is a dollar amount you can subtract from your taxable income to reduce the amount of money you’ll owe in taxes. If you get confused between a deduction vs credit, just remember that a deduction goes hand in hand with subtraction. You can deduct things like retirement plans, interest and home office expenses. But those are just a fraction of the deduction possibilities. Taking deductions on your tax return helps lower your taxes and save you money.
The two types of deductions are standard deductions and itemized deductions.
Standard deduction
Itemized deductions
How do tax deductions work?
When filling out your tax return, you'll need to pick either the standard deduction or the itemized deduction option. Once you calculate your deductible amount, you'll apply this amount towards your income, lowering your income by the deducted amount. This will lower your income, so you owe fewer taxes.
What counts as a deduction?
The list is pretty extensive when it comes to the types of deductions you can make. If you're a freelancer, gig worker or self-employed person, there are some important deductions to keep in mind when it comes time to file your taxes.
Home office and home improvement deductions
Food and entertainment
Travel
Charitable contributions
Health insurance
How do tax credits work?
If there’s one important tax question to answer, it’s how does tax credit work? First, we need to understand tax credits. Tax credits are essentially a decrease in your tax bill. So if you receive a $2,000 credit, your tax bill decreases by $2,000.
Unlike a deduction, tax credits reduce the amount of taxes you’ll owe, making them the more favorable option. The credit value depends on the type of credit.
With a bit of research, you can score a bunch of tax credits from the IRS. Some tax credits you might be eligible for include the Child Tax Credit, Earned Income Credit, Education Tax Credit, Recovery Rebate Credit or the EV Tax Credit. You’ll need to check the eligibility requirements to see if you qualify for any of the tax credits.
How to reduce taxable income?
In a tax savings battle, credit vs deduction, there really is no clear winner as it depends on your individual tax circumstances. But it’s worth noting that tax credits generally save you more in taxes than deductions. Tax credits will directly reduce the amount of taxes you owe.
In addition to claiming tax credits to reduce your taxable income, there are a few other ways to save money.
Open an HSA account
Deduct student loan interest
Sell underperforming stocks
What is tax liability?
Tax liability is a fancy way of saying the payment owed by an individual or business to a local, state or federal tax authority. Essentially it’s the amount of taxes you owe. It’s the total amount of money you’re required to pay from income like salary, lottery winnings, investments, interest etc.
What’s FlyFin?
FlyFin caters to the tax needs of self-employed individuals, including freelancers, gig workers, independent contractors and sole proprietors.
The A.I.-powered tax service tracks all your business expenses automatically to find every possible tax deduction.
Then, our CPA team files a guaranteed 100% accurate tax return for you – to save you a couple thousand dollars and a ton of time on your taxes. And anyone, self-employed or not, can have their taxes filed through FlyFin!
Download the FlyFin app and let the CPA team file a 100% accurate tax return for you in less than fifteen minutes, saving time and more money on your taxes than last year, guaranteed.
Expert tax CPAs ensure 100%-accurate tax filing
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On average users save $3,700
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