What Are The Differences Between Tax Deductions And Tax Credits?

We all like to claim tax deductions and credits when filing our tax returns. They both allow us to pay less tax—and who doesn’t like that? 

But do you know that tax deductions and tax credits lower our taxes using totally different mechanisms? In other words, they are not the same thing and many people often don’t realize this. 

So, how can you tell these two confusing concepts apart? 

Read on to find out! 

What is a tax deduction?

A deduction lowers the income subject to taxation, resulting in you paying less in taxes. In other words, before calculating how much tax you owe, you subtract deductions from your income. Common tax deductions include home office deduction, student loan interest, and retirement contributions.  

How much you can save from tax deductions depends on your marginal tax rate. Simply multiply the tax deduction by the marginal tax rate to figure out how much that deduction can decrease your taxes. For example, if you have a $2000 deduction and you fall into the 22% tax bracket, you will be able to lower your taxes by $440. So, the higher the tax bracket you’re in, the more value deductions will bring to you. 

What is a tax credit? 

A tax credit lowers the amount of taxes you owe directly. Common tax credits include the American Opportunity Tax Credit (AOTC), the Child Tax Credit, and the Saver’s Tax Credit

It’s very simple to know how much your tax credit will save you. You don’t need any marginal tax rate or calculation. Once you meet all the requirements of a specific tax credit, subtract the value of that tax credit directly from your taxes. 

For example, let’s say you have a tax bill worth $6000 this year. A $2,000 tax credit decreases your taxes straight down dollar for dollar—now you only owe $4000 to the IRS! 

Tax deduction vs. Tax credit: Which one should you choose? 

Generally, tax credits benefit you more than tax deductions since they lower your tax bill directly. Still, if you can only take a tax credit or a deduction for the same expenses, do the math to determine which one will save you the most money possible. 

In conclusion 

Knowing how to distinguish between these two important tax terms, tax deductions and tax credits will help you file taxes quicker and more accurately and prevent you from making unfortunate costly mistakes. 

After you file your tax return, you may think the tax nightmare is over. However, to be cautious, experts advise keeping a copy of tax receipts for up to seven years in the event of audits. If you need an easy way to deal with this, Shoeboxed can help you! 

Shoeboxed is an online application that can transform your receipts and documents into digital in just a click. Then, it automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes. 
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4 Green Tax Credits Available for Environmentally Friendly Businesses

Now more than ever, small businesses and tax payers in general are looking for greener options when it comes to tax deductions. From fuel-efficient vehicles to growing trees, here’s a look at green tax credits that environmentally friendly businesses can deduct this year.

Every tax season, there’s a big focus placed on the latest deduction trends – what new big purchase from the year can help reel in the biggest deduction for a small business.

Now more than ever, small businesses and taxpayers in general are looking for greener options when it comes to tax deductions.Outside of the principle of being able to do some good while saving money, many entrepreneurs also run their businesses out of their homes and there are plenty of credits available that they might overlook otherwise. From fuel-efficient vehicles to growing trees, here’s a look at what green businesses can deduct this year on their tax returns.

Using your fuel-efficient vehicle for work

You can score some major deductions on using your car for work purposes. As stated by the IRS, the 2014 standard mileage rates for cars, vans, and pickup trucks is 56 cents per mile for business miles driven, 23.5 cents per mile driven for medical or moving purposes, and 14 cents per mile driven in service of charitable organizations.

A shortlist of the deductions available include driving anywhere from work to another work site, going to a meeting, or meeting a client. You can get that driving money back for parking fees/tolls, registering your vehicle, rental expenses, gas, insurance and maintenance. For more information about the credits available for electric vehicles and plug-in hybrids, check out the U.S. Department of Energy’s fuel efficient vehicle tax incentives information center.

This year, make those charitable deductions green

Publication 526 for charitable contributions lays out the organizations qualified to receive deductible contributions as well as examples of what is and isn’t a deductible contribution.  One great option for companies of all kinds is to make a donation for old electronic devices. Maybe your business is updating its computers; by dropping them off, or even having them picked up, at a qualified charity organization such as Goodwill, you are preventing the mixing of hazardous materials with our landfills.

Deduct the very roof you work under!

Your own office may qualify for an Energy Efficiency Tax Deduction. Available for commercial property owners and leaseholders, this deduction can save you as much as $1.80 per square foot of your work building, if your building holds a 50% reduction in energy and power costs (i.e. if your office shows signs of energy efficiency in areas including interior lighting, heating, cooling, ventilation and hot water systems).

These energy-saving tools may be pricey to install at first, but they can save you and your business plenty of money in the long run – and a tax deduction can help you gain some of that installation money back.

Got a green thumb? That’s deductible!

Some states have obscure deductibles that, for the savvy business owner, need to be rooted out for extra savings. South Carolina residents receive $50 if they donate a deceased deer to the poor, and if you grow state-approved trees in Hawaii, you’re looking at as much as $3,000 in deductions! Scout out some of the lesser-known deductions available within your state – you never know what you’ll find that can apply to your business. 

What green tax credits does your business qualify for? Let us know in the comments!

Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Google+ and on Twitter @mycorporation.

New White Paper: Five Proven Methods to Reduce Small Business Taxes

January is always a busy month around Shoeboxed HQ. The beginning of each new year brings lots of New Year’s resolutions on getting organized, the launch of some great new features and… the dreaded countdown to April 14th. Years change, but unfortunately tax day never does.

Since tax season is important to all of you, it’s important to us, and this year we wanted to be as proactive as possible in helping you get prepared. After all, who doesn’t enjoy reducing their tax burden?

With that in mind, we’re pleased to release our brand new white paper: Five Proven Methods to Reduce Small Business Taxes.

Shoeboxed White Paper Five Proven Methods to Reduce Small Business TaxesWith the help of Stancil & Company CPAs we set out to answer the simple question: what’s the best way for you and your small business to save on taxes this April? In the white paper we explore:

  • Why a well-designed retirement plan is the easiest way to save on taxes
  • Why identifying the proper method of accounting is crucial to tax savings
  • The best way for your children to help you maximize deductions
  • Tons more!

Download our free white paper today and prepare to save on your small business taxes this April!

Stay Organized,

The Shoeboxed Tax Team