Tax exemptions, deductions, and credits are all tools which can reduce the amount of taxes that a person owes. Some of these reflect a person’s ability to pay tax, while others are incentives intended to advance specific social policy goals, such as charitable donations and home mortgage interest payments. Here are the three types in brief:
These are a list of items that can reduce your taxable income set at a fixed amount just for being you! The personal exemption is the amount that each filer, which can include a spouse and each dependent, such as children, can exclude from his or her taxable income. This number is still subject to an income tax rate.
Unlike exemptions, deductions are specific types of expenses that you’ve paid during the tax year that you can also claim against your taxable income. The two primary types are standard and itemized. Standard is a fixed amount which most filers choose. Itemized deductions – such as home mortgage interest, charitable contributions, and state and local taxes – is usually chosen by filers of high-income due to the amount they spend on qualifying deductions, as the amount will often be higher than the standard set deduction. Deductions, like exemptions however, are also subject to income tax rates.
In contrast to exemptions and deductions, which together reduce a filers taxable income, credits reduce the amount your calculated taxes. In other words a credit is a benefit for spending money on certain things, such as college tuition, in which you subtract the credit amount to the taxes you would owe. Similar to taking a discount after your total amount has been calculated.
There are many levels and types of exemptions, deductions, and credits not listed in this brief treatise. Contact our experts today at 407.892.1066 and see how much you qualify for!