Now is the time to begin midyear tax planning. Take time to review some important terms that are all about saving money on your tax return.
As you begin to think about scheduling your midyear tax planning appointment, refresh your memory on the meanings of terms that can save you money. Here are three.
- Exclusion. Exclusions are items that would generally be included on your return, but are specifically excluded by a tax law provision. For example, gifts and inheritances you receive are excluded from your income – you simply don’t report them on your federal tax return.
- Deduction. By definition, a deduction means an amount is subtracted from your income. Tax deductions fit into four general categories.
Above the line deductions, such as alimony paid, can be claimed even if you don’t itemize.
Itemized deductions are a specific group of expenses, including amounts you pay for certain taxes, medical costs, charitable donations, mortgage interest, and disaster losses.
The standard deduction is a simplified substitute for itemized deductions. It’s a flat amount you can use to reduce your gross income instead of itemizing each allowable expense.
Business deductions are the ordinary and necessary expenses required for carrying on your trade or business.
- Credit. Income tax credits are subtracted from the tax you owe. Note the difference from the definition of deductions, which reduce your income and indirectly reduce your final tax bill.
Tax credits can be refundable, meaning you’ll get money back if the credit exceeds the amount of tax you owe. Nonrefundable credits can only reduce your tax to zero.
These terms can be confusing. Call if you have questions about these tax-savers and how including them in your midyear planning can benefit you.