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How Deductions and Credits Work Together to Reduce Your Tax Bill
How Deductions and Credits Work Together to Reduce Your Tax Bill
Navigating the world of taxes can feel overwhelming, but there’s one thing all taxpayers can agree on: the value of saving on taxes. By understanding how deductions and credits work, you can keep more of your hard-earned income. Whether you’re a freelancer, business owner, or simply looking to maximize your savings, tax deductions, along with credits, offer powerful tools to lower your taxable income and reduce the amount you owe.
We’ll break down essential strategies and insights to help you unlock tax savings, so you can approach tax season confidently and strategically.
Taxes is something that everyone has to deal with, but only some people qualify for tax credits and deductions that can help reduce their tax burden. If you’re a freelancer or self-employed, you may also be eligible for business deductions, which can greatly lower the taxes you owe. These deductions are often considered the ultimate way to save on taxes.
Some W-2 employees working for a company, as well as self-employed individuals, may qualify for tax credits that can directly reduce their tax bills. Additionally, anyone who pays self-employment taxes can deduct their business expenses from their taxable income. Freelancers who are eligible for both business deductions and tax credits can significantly lower the amount of tax they owe.
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What is the difference between tax deduction and a tax credit?
If you’re new to working for yourself, you might be wondering what is a tax write-off and what is a tax credit. Both can help you save significantly on the tax you owe, but the difference between them is fundamental and important to know, so that you can use as many of them that you qualify for.
FlyFin uses A.I. to make sure you find every possible deduction, and a team of CPAs who specialize in freelancer taxes to make sure you know all tax credits available to you and all the ways you can save on your taxes.
What is a tax write-off?
Just about anything someone who works for themselves needs to purchase in order to do their work or keep their small business running can be considered a tax write-off, also known as a deductible business expense.
The Internal Revenue Service has a huge list of all the things that qualify as a deductible business expense, but here's the general rule: if something is necessary and ordinary (the IRS’ words) for your line of work or your type of business, it’s probably deductible.
Are you a freelance handyman? Your tools are a deductible business expense. Own a consulting business where you’re the sole proprietor? You can write off the cost of advertising your services. A tax deduction calculator is a useful tool that can help you find business expenses that can be written off.
How do tax deductions work?
That camera you purchased for your wedding photography business is absolutely a tax deduction, also known as a tax break or write-off. But what does it mean to deduct something from your taxes? When you’ve done the calculations, and you know how much you’ve made throughout the year, you know how much income you have to pay taxes on. If you think you'll owe more than $1,000 in taxes, you'll need to make estimated tax payments every quarter.
That tax bill, however, can be lowered by subtracting the cost of business expenses. Say you made $100,000, and you owe $20K in tax on that income. The cost of your camera, your car expenses for getting to gigs and back and even online classes on the latest photography techniques can all be subtracted from that $20K of income tax you owe. So you'll have less income that will be taxed and will effectively owe less tax.
What is a tax credit?
The federal government offers discounts, known as tax credits, to individuals who may experience greater financial strain from paying income tax compared to the average American. For instance, those who are working hard but earning lower wages can benefit from these tax credits, which reduce their overall tax liability. Tax credits also assist people who are enrolled in school or have children by deducting a specific dollar amount from their tax obligations.
How do tax credits in 2024 work?
Tax credits in 2024 offer direct reductions to your tax bill, making them an effective way to maximize savings. Unlike deductions, which lower taxable income, tax credits provide a dollar-for-dollar reduction on the taxes owed.
For instance, if you owe $3,000 in taxes and have a $1,000 tax credit, your tax bill reduces to $2,000.
Tax credits come in two main types: non-refundable and refundable.
Non-refundable credits can reduce your tax bill to zero, but any unused amount won’t be refunded to you. Refundable credits, however, can provide a refund even if they exceed your tax bill. In 2024, popular credits include:
- Earned Income Tax Credit (EITC) - for low- to moderate-income earners.
- Child Tax Credit (CTC) - designed to support families.
What are the most popular deductions?
When it comes to maximizing your tax savings, understanding the most popular tax deductions in 2024 is essential. Commonly deductible expenses can significantly reduce your taxable income, helping you keep more of your earnings. Knowing what is deductible allows taxpayers to strategically plan their finances and take advantage of available tax benefits. Here’s a tax deductions list, that might apply to you:
Home office deduction
Vehicle expense deduction
Business travel deduction
What are the most important tax credits?
The federal government offers several tax credits aimed at assisting taxpayers with lower incomes. Many people are familiar with credits that help reduce the costs of childcare or provide educational benefits The Child Tax Credit helps parents pay less in taxes, so they can better support their kids. The American Opportunity Credit gives students a break on education-related expenses.The Earned Income Credit helps people working low-wage jobs pay less tax on their income.
If you work for yourself, it’s important to know the differences between tax deductions and tax credits, so you can take advantage of every opportunity to save on your taxes. FlyFin’s unique combination of A.I. and CPAs gives freelancers, self-employed individuals, and independent contractors industry-best tools to take advantage of both.
For freelancers and independent contractors, free tax filing options can make a big difference, especially when getting started with managing business finances. FlyFin offers free tax filing for the first year.
With the tax filing deadline for 2024 on April 15, getting started early can help you organize your financial records and optimize your tax return. FlyFin’s platform streamlines tax filing by simplifying deduction tracking, guiding you on tax-saving opportunities, and helping you avoid common pitfalls. If you’re eligible for tax credits or need to itemize deductions, FlyFin’s tools make it easy to understand what expenses are eligible and prepare for the upcoming deadline without stress.
What’s FlyFin?
FlyFin caters to the tax needs of freelancers, gig workers, independent contractors and sole proprietors.
But anyone can file taxes through FlyFin! FlyFin tracks all your business expenses automatically using A.I. technology.
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.
In addition, you can download the FlyFin app and have your taxes filed in less than fifteen minutes, saving time and money.
Expert tax CPAs ensure 100%-accurate tax filing
A.I. finds every tax deduction, eliminating 95% of your work
On average users save $3,700
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