If you are a U.S. citizen, you will agree that the United State’s tax code provides its citizens with lots of opportunities for reducing tax debts such as tax exemptions, tax deductions and tax credits. However, each of these aspects has different requirements that you have to meet in order to use benefits provided by all of them.
Today, Prestige Auditors are going to bring to your attention three main concepts which will help you drastically reduce your tax liabilities and increase your revenue without putting serious efforts into these processes.
Generally, there are three main ways for reducing your tax debts:
- Tax Deduction
- Tax Credit
- Tax Exemption
A tax deduction allows a person or an organization to reduce their taxable income. In other words, deductions are expenses that taxpayers spend during the year and can reduce your taxes when it comes to figuring out how much taxes they owe to the IRS. The total amount of your savings from the deduction directly depends on your income tax brackets.
As a taxpayer, you should keep in mind that different states have different tax codes that provide taxpayers with an opportunity to deduct different expenses from their taxable income. Tax deductions are set by the government and allow taxpayers to take part in different community service programs. Keep in mind that if you pay high tax rates, you can gain more benefits from deductions.
A tax credit is an amount of sum that individuals are allowed to deduct from taxes that they owe to the government. The main goal of tax credits is to reduce the actual amount of taxes. The value of tax credits directly depends on factors such as the type of the credit, since there are several credits which differ based on classification, specific location, and industries. We suggest that you also read this blog about main differences between tax credits and tax deductions.
Generally, there are many types of tax credits available for taxpayers:
- Income Tax Credit
- Child Tax Credit
- Foreign Tax Credit
- Input Tax Credit
Tax exemptions provide taxpayers with the widest variety of tax benefits. So, you can get an exemption both for yourself and other members of your family who are considered to be your dependents. You can also read this blog and find everything that you should know about tax exemption.
The Difference Between Tax Credit and Tax Exemption
The main difference between tax credits and tax exemptions is that an exemption’s main goal is to reduce your taxable income, whereas tax credits reduce your main tax bill. However, tax credits are more popular among most U.S. taxpayers. Keep in mind that the end result of both tax deductions and tax credits is the same; you pay less in taxes. But as a taxpayer, you should strictly understand the main differences, since it will help you stay more organized and prepared when it comes to your taxes.
The Difference Between Tax Deductions and Tax Credits
The same rule goes when it comes to the difference between tax deductions and tax credits. Tax deductions’ main aim is to reduce your taxes, whereas tax credits can reduce the amount of taxes that you owe to the IRS.
Tax deductions can lower the amount of income that you are going to pay taxes by introducing expenses that you have spent during the year.
Of course, all of these options work in different way; however, their main goal is reducing the amount of taxes that you owe to the IRS. Try to do your best in order to understand the main differences each of them has, since in this case you can maximize the value of every deduction or credit that you are eligible for.
If you do not have enough experience, but still want to gain advantages provided by your local government, you can contact Prestige Auditors and we will help you choose all the optimized deductions that you are eligible for. Additionally, we will help you apply for all the credits that you might be able to claim. Due to the efforts of our professional tax experts, you can be sure that you take all the benefits provided by both deductions and credits. Additionally, we will help you obtain an LLC for online business and tell you everything concerning e-commerce taxation, mainly how to get tax exempt on Amazon and how to file a Walmart tax exempt application. You can go through our website and find the entire list of services provided by our company.