Tax Terms Explained: Tax Credits, Deductions, & Exemptions
Editor’s Note: Most federal individual tax returns are due on Tax Day. Here are key tax terms explained to help you file your return as accurately as possible.
There are a few important terms that get thrown around cavalierly at tax time. And, truth be told, they actually sound really similar. So it can be hard to tell what each means and how they heck they are different. Here’s a quick primer on what you need to know about exemptions, deductions and credits.
A deduction also decreases your taxable income. If you claim the standard deduction, it will decrease by a fixed number that is determined by your filing status. If you qualify for certain deductions, you may be able to reduce your taxable income by a greater amount by itemizing. Common deductions include those for medical expenses, charitable donations, mortgage interest and more.
Credits are where the fun happens, at least sometimes. Some credits are non-refundable. That means they will directly reduce the tax you owe. These credits may take your tax liability down to zero, but not beyond that.
However, refundable credits will pay you back – in the form of a tax refund – beyond this zero mark. Some of the most common refundable tax credits are the Earned Income Tax Credit, the additional child tax credit and the American Opportunity Credit (partially refundable).
Tax deadlines have been extended this year for your federal and state returns. Still need to file? Find out what you need to know from the team at H&R Block.
If you’re itemizing deductions, the IRS generally allows you a medical expenses deduction if you have unreimbursed expenses that are more than 7.5% of your adjusted gross income for tax years 2017 or 2018. You can deduct the cost of care from several types of practitioners at various stages of care.
Do you own real property in Pennsylvania? Learn more about PA property tax, if you owe this year and how to pay with help from H&R Block.
Learn more about the different taxes on your paycheck including federal, state, social security and medicare withholding with the experts at H&R Block.