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).
When it comes to making everyday tax decisions, we find that there's a gap between what's true and what's rumored. Let's explore four common tax myths.
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