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Difference Between Deductions and Credits

Feb 27, 2012

Deductions and credits can lower your tax, but there is a difference between the two.

  • Deductions are amounts that are subtracted from your taxable income. They reduce the amount of income that is subject to income tax. Common deductions include the standard deduction, itemized deductions, the deduction for exemptions, and adjustments to income for education expenses and IRA contributions.
  • There are two types of credits: nonrefundable and refundable.
    • Nonrefundable credits are amounts that are subtracted from your income tax. They reduce your tax liability, but not below zero. Nonrefundable credits include the Child Tax Credit, Child and Dependent Care Credit, energy credits, and Retirement Savings Contributions Credit.
    • Refundable credits are added to your withholding and other tax payments you made, increasing your refund, reducing the amount you owe, or changing an amount owed into a refund dollar for dollar. Refundable credits include the Earned Income Tax Credit, Additional Child Tax Credit, the First-Time Homebuyer Credit, and the Making Work Pay Credit.

Typically, if you have a choice, it is better to take a credit than a deduction. For example, let's say you are single, your income is $16,500, and you paid $1,000 to attend school part time to work on getting your degree. In this case, you can either take the Lifetime Learning Credit or the tuition and fees deduction for your qualified education expenses.

  • If you take the Lifetime Learning Credit, your taxable income after the standard deduction and exemption amount is $7,150. The tax on this amount is $718. You qualify for a $200 Lifetime Learning Credit, which reduces your total tax to $518.
  • If you take the tuition and fees deduction, you qualify for a deduction of $1,000, which makes your taxable income after the standard deduction and exemption amount is $6,150. The tax on this amount $618. There is no credit to reduce this amount, so your total tax is the same $618.
  • Although the credit of $200 is a lower dollar amount than the deduction of $1,000, the credit is better because it makes your total tax lower. Taking the credit instead of the deduction could mean an increase in your refund of $100 ($618 ? $518 = $100).

Certain rules apply for taking deductions and credits. Please feel free to stop by our kiosk for additional information.

Answers To Your Tax Questions

Frequently Asked Questions
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What Should You Bring To You Jackson Hewitt Tax Interview

Do you know what documents are needed for your interview?

Check the list below. You many not need or have all of these documents. Bring the ones you have. If you have questions, ask your Jackson Hewitt tax agent.

What to bring:

  • Wage statements/W-2s
  • Driver’s license(s)
  • Social Security card(s)
  • Dependents’ Social Security numbers and dates of birth
  • Last year’s Federal and State tax return, if not a prior-year client
  • Child care expenses and provider information
  • Lottery or gambling winnings/losses
  • State or local taxes paid
  • Mortgage or home equity loan interest paid/1098
  • Real estate and personal property taxes
  • Cash and non-cash charitable donations
  • Medical and dental expenses
  • Record of purchase or sale of residence
  • Alimony paid or received
  • Unreimbursed employment-related expenses
  • Job-related educational expenses
  • Educator expenses
  • Tuition and Education Fees/1098-T
  • Student loan interest/1098-E
  • Casualty or theft losses
  • Commissions received/paid
  • Pension, retirement income/1099-R
  • Unemployment income/1099-G
  • Canceled Debt Amount/1099-C
  • Social Security income/SSA-1099
  • IRA contributions
  • Statements on the sales of stocks or bonds/1099-B
  • Interest and dividend income/1099-INT/1099-DIV
  • State refund amount/1099-G
  • Income and expenses from rentals
  • Self-employed business income and expenses/1099-MISC
  • Estimated taxes or foreign taxes paid
  • HUD-1 statement or substitute, if new home purchased

Do You Need An ITIN (Individual Taxpayer Identification Number)

Find Out If You Qualify and Whether You Need to Apply for An ITIN

An ITIN (Individual Taxpayer Identification Number) enables individuals who aren't eligible for Social Security Numbers to comply with US tax laws and take care of their IRS requirements. The ITIN is issued for the purpose of filing taxes but has other uses such as:

  • Establishing credit
  • Opening a Bank Account
  • Purchasing a House or Automobile
  • Renting An Apartment or House
  • Starting a Business

An ITIN cannot be used for employment purposes.

Jackson Hewitt Tax Service can assist as a Certificate Acceptance Agent before IRS with the application process for the ITIN, including the following steps:

  • Completing Form W-7.
  • Completing Form 1040.
  • Jackson Hewitt Acceptance Agents send paper forms of all documents to the IRS.

Family members can be included on tax returns filed using ITIN if:

  • They qualify as dependents
  • They live in Canada, Mexico or the United States
  • If dependents do not qualify to obtain a social security number you can apply for ITIN's for them.
  • By law the IRS is prohibited from communicating with the Department of Immigration unless tributary fraud should exist.

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