As you begin to think about scheduling your mid-year tax planning appointment, refresh your memory on the tax terms that can save you money. There are three.
Exclusions are items you’d generally include on your return, but are specifically excluded by a tax law provision. For example, you exclude gifts and inheritances you receive from your income. You simply don’t report them on your federal tax return.
By definition, a deduction is an amount you subtract from your income. Tax deductions fit into four general categories.
- You can claim above the line deductions, such as alimony paid, even if you don’t itemize.
- Itemized deductions are a specific group of expenses, including amounts you pay for certain taxes, medical costs, charitable donations, mortgage interest, and disaster losses.
- The standard deduction is a simplified substitute for itemized deductions. It’s a flat amount you can use to reduce your gross income instead of itemizing each allowable expense.
- Business deductions are the ordinary and necessary expenses required for carrying on your trade or business.
You subtract income tax credits from the tax you owe. Note the difference from the definition of deductions, which reduce your income and indirectly reduce your final tax bill.
Tax credits can be refundable, meaning you’ll get money back if the credit exceeds the amount of tax you owe. Nonrefundable credits can only reduce your tax bill to zero.
Have questions about reducing your tax bill? Let’s talk!