Tax Planning: Facts About Credits and Deductions

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Tax credits and deductions can mean more money in a taxpayer’s pocket. Here are a few facts about credits and deductions that help taxpayers with their year-round tax planning:

  1. Taxable income is what’s left over after someone subtracts any eligible deductions from their adjusted gross income. This includes the standard deduction ($12,5550 in 2021 for single filers; $25,100 for married filing jointly). Most individual taxpayers take the standard deduction. On the other hand, some taxpayers may choose to itemize their deductions because it could lower their taxable income.
  2. As a general rule, if a taxpayer’s itemized deductions are larger than their standard deduction, they should itemize. Also, in some cases, taxpayers may even be required to itemize.
  3. For a quick overview of what expenses they may be able to itemize, taxpayers with less complicated returns may be able to use the Interactive Tax Assistant found on the IRS website.
  4. Tax credits are subtracted from the total amount of tax owed. To claim a credit, taxpayers should keep records that show their eligibility for it.
  5. The American Rescue Plan changed several valuable tax credits, including the child and dependent tax credit, the childless earned income tax credit, the childless earned income tax credit, and the child tax credit. It’s important for taxpayers to understand how these changes may affect the 2021 tax return.
  6. Properly claiming tax credits can reduce taxes owed and boost refunds. Some tax credits, like the Earned Income Tax Credit (EITC), are even refundable, which means a taxpayer can get money refunded to them even if they don’t owe any taxes.

To learn more about how you can save money on your 2021 tax return by planning ahead, please call the office today.

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.