Taxes

[BUENG1]

I have a question about my tax return. Since my return is relatively easy, I'm going to do it myself. The question is whether it would be more beneficial to take the interest deduction or the life long or hope credit. I graduated from school in 2008. The issue I have with is the difference between a deduction and a credit. I paid taxes in 2008, however I will be getting a refund(for less than withheld), will I get anything from the credit? The IRS booklet says credits only decrease liability, does this mean liability at the time of filing, or liability overall(if you've paid any taxes).

[IrishCarBomb]

Usually, credits are better than deductions.

 

A credit reduces what you owe in taxes. A deduction just applies to your income. It reduces the amount of money the tax formula applies to. When the credit says it just reduces your tax liability, it just means that if it reduces the total tax owed below zero, you won't get paid back any money. Different types of credits will actually pay you money if you reduce your tax liability so much that it becomes negative.

 

Say you pay 35% taxes and you make $50,000. Here's the difference between a deduction and a credit:

 

$2,000 deduction:

 

($50,000 - $2,000) x 35% = $16,800 owed in taxes.

 

 

$2,000 credit:

 

$50,000 x 35% = $17,500 - $2,000 = $15,500 owed in taxes.

 

Since credits apply after the tax rate, they are basically worth almost three times as much as a deduction.

[carhill]

http://www.irs.gov/pub/irs-pdf/p970.pdf

 

If you use tax preparation software, it will help you use your numbers to your best advantage.

 

Generally, credits are superior to deductions, especially if they are refundable, meaning, even if you owe zero tax, you'll get a check back from the IRS in addition to <a refund of> any taxes you've paid in. The earned income credit is an example of a refundable credit.

 

The IRS booklet says credits only decrease liability, does this mean liability at the time of filing, or liability overall(if you've paid any taxes).

Essentially, this means the credit can reduce your tax liability for the year for which the return is filed to no less than zero. I'd have to read the specifics to know if there is a carryover. I know the old investment tax credits could be carried over via a certain formula. It's not uncommon for a credit to carry over (to the next tax year).

 

I'm not an accountant but do taxes for my wife's and my businesses and my dad was a CPA. IRS was his middle name