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Do you know the difference between a tax credit and a deduction? PIOG

Posted by on Feb. 2, 2013 at 8:47 PM
  • 2 Replies

 

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Question: Before reading this post did you know the difference between a tax credit and a deduction?

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Total Votes: 13

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I know this time of year many people on here question how people that don't make much money get large refunds. Or they don't understand why they always owe income tax. I wanted to see how much the average person actually knows about the income tax system. Please note I am not saying it is a perfect system.

So just some quick tidbits:

1. The amount of federal tax taken out of you pay is determine by the amount of allowances you list on your w-4 when you start your job. The more allowances listed the less they take out. (They assume you need the money when you make it) if you owe every year you may want to look the number of allowances you have and adjust it. You can do this anytime of year.

 2. Deductions are subtracted from your gross income to help determine your adjusted gross income. Everyone gets deductions. This is the amount used to determine how much tax you actually owe.

3. Tax credits are used to reduce the amount of tax you owe. For example if you owe $2200 in taxes and you $1200 in credits you still have to pay $1000 in taxes. Not everyone qualifies for tax credits.

 4. Once the amount of taxes you owe has been reduced by all the credits you qualify for the amount remaining is the tax you.

5. Then the tax payments you made through out the year (the amount on your w-2) are subtracted from the amount you owe. If you overpaid you a refund...if you underpaid you will owe. There are times where people have more in tax credits then the amount of tax they owe. For example you owe $2200 in taxes but you have $3000 in tax credits. In this case you get a refund of $800 and you get back any money you paid throughout the year.

So that is just a quick basics in how deductions and credits work. I don't know if that actually explains it any better but that is how people who don't pay in a lot end up with refunds some times. and of course this is for pretty basic taxes....there are a lot of situations that can complicate things.

by on Feb. 2, 2013 at 8:47 PM
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Replies (1-2):
Christy_517
by Invisible on Feb. 2, 2013 at 9:10 PM
Yes but I know because I'm in school to get my degree in accounting. :)
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ebbierowe
by Ruby Member on Feb. 3, 2013 at 9:10 AM
Bump
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