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Tax deductions and tax credits. Standard deductions and itemized deductions. Refunds and the new tax law.
Tax season is here again, which is probably the only time you spend seriously thinking about these terms and what they mean for you. And while we’re a bank, we’re not tax experts or provide tax advice. So here’s a refresher on tax filing terms and facts, from tax experts who do spend all year thinking about it.
And if you’re looking to get a jump on your taxes, we’re offering a special TurboTax discount for Umpqua customers. (Not a customer? Open an account online. Our new Access Checking is tailored to the digitally minded.)
What’s a tax deduction? A tax deduction lowers your taxable income. For example, if your family makes $100,000 and you claim a $1,000 deduction, then your taxable income is $99,000. Enough deductions can put you in a lower tax bracket, which saves you money. As always, there’s a lot more to know about tax brackets, but those are the basics.
What’s the standard deduction? It’s like Uncle Sam handing you an envelope of cash and saying, “Here, I never saw this.” The standard deduction is a flat amount of your money that doesn’t get taxed, and it’s the deduction most of us take. For trivia fans, Marketplace has a good history of the standard deduction, from World War II to alpaca farming to the present day.
What are itemized deductions? This is when it pays off to keep your receipts and detail out your charitable giving, property taxes and more. If you add up all your individual deductions and they total more than the standard deduction, then you get to claim the larger, itemized amount. And before you ask: no, you can’t claim both the standard and itemized.
What’s a tax credit? A tax credit lowers the amount of tax you owe (i.e. your tax liability). A tax credit of $1,000 would cancel out $1,000 in tax.
Is a deduction or credit better? The people at TurboTax lay this one out really well: In a one-on-one matchup, the credit wins. A $100 tax credit reduces your tax dollar-for-dollar. If, say, you are in the 25% tax bracket, a $100 deduction reduces your taxes by $25.
Does the new tax law affect this year’s taxes? Generally, no. The taxes you file this year – and any refund you get – are not affected by the new tax law.
Speaking of a refund, I got one. I want to save a bit and splurge a bit without blowing it all on something silly. What should I do? We’ve got some tips.
All the best as you file your taxes, and don’t forget about our TurboTax discount.