Tax season can be overwhelming, and many things come into play when it comes to the number you end up with as your tax bill. When it comes to tax and personal finance, two terms that are often confused are tax deductions and tax credits. Although both are great for reducing your tax liability, they function in two completely different ways. This guide intends to articulate the differences between tax deductions and credits as well as how these can help residents with the help of tax accountants in Westchester County, NY

What Are Tax Deductions?

Tax deductions lower the portion of your income that is taxable. These are deducted from your gross earnings to get your taxable income. Put differently, deductions lower your tax bill because they reduce the taxable income.

Types of Tax Deductions:

• Standard Deduction: The IRS has a standard deduction, an average sum that is minus your income. The standard deduction is $13,850 for individual filers and $27,700 for married couples filing jointly in 2023.
• Deductions: Instead of claiming the standard deduction, they can itemize them. It starts with making an inventory, with all the deductible expenses (mortgage interest, property taxes, medical expenses, and donations). If the sum of deductible expenses exceeds the standard deduction, then for many Westchester residents especially homeowners itemizing results in greater tax savings.

What Are Tax Credits?

A tax credit reduces the taxes you owe, dollar for dollar. Credits, on the other hand, reduce your tax bill rather than just lowering income subject to tax like deductions do. Tax credits are of two types — nonrefundable and refundable.

Types of Tax Credits:

• Nonrefundable Tax Credits: You can only use these credits to reduce your tax bill to zero. The drawback is that if your credit is higher than the amount of tax you owe, the excess just goes away. Such as the lifetime learning credit or child and dependent care credit.
• Refundable Tax Credits: You can not only reduce your tax liability to zero with these credits, but you will also receive a refund. That means if the credit is greater than your tax liability, you get the rest back as a refund. That includes programs such as the Earned Income Tax Credit (EITC) and the Child Tax Credit.

The Difference between Deductions & Credits

• Tax liability effect: Deductions lower your taxable income, but credits lower your tax bill
• Eligibility and Limits: Eligible property, basis limit on certain credits. Certain deductions and credits are accessible to every taxpayer, others have income thresholds or the requirement of being eligible for a specific filing status.
• Record-Keeping and Complexity: Itemized deductions such as home mortgage interest, property taxes, and charitable donations hopefully need thorough documentation in many cases. On the other hand, a few tax credits make qualifying easy and will not require much paperwork at all.

Getting the Most Out of Your Tax Benefits in Westchester

The following tactics should be taken into account by Westchester residents to maximize tax credits and deductions:

• Keep Detailed Records: Keep careful track of all possible credits and deductions. This includes statements, receipts, and other supporting paperwork for your claims.
• Assess Your Circumstance: Determine if itemizing or taking the standard deduction will benefit you more. You may save more money on taxes if you itemize your deductible costs if they are substantial.

For effective tax planning and to reduce your taxable income effectively, you should know the difference between a tax deduction and vs tax credit. As we get more into tax season, Westchester residents should take the time to analyze their finances and recordkeeping can be extremely helpful in terms of taxes. Utilizing both deductions & credits, you may lower your tax bill or increase the money coming back to you so that you can pocket more of yourself.