Whew, 2017’s taxes are filed. It’s tempting to ignore the whole subject until next April. However, it’s smarter to pay attention now, in order to save money next April by planning ahead for deductions and credits.

How is a tax deduction different from a tax credit?

A deduction is an amount subtracted from the amount of your income that will be subject to tax.

A credit is a subtraction from the amount of tax you owe.

Suppose, just for an example, a single person has an income of $30,000. If there were no deductions, his tax would be $4,000. For 2018, the standard deduction is $12,000, so instead of paying tax on the whole $30,000, he’s taxed only on $18,000. His tax due is $1,800. So that deduction saved him $2,200 in taxes.

Once the tax has been computed, then we can think about credits. A tax credit is subtracted directly from the tax due. It reduces the tax amount directly, instead of reducing the amount of income to be taxed. In the ten percent tax bracket, a deduction of $1,000 from income saves you only ten percent of that $1,000, or $100. If our hypothetical taxpayer who owes $1,800 is eligible for a credit of $1,000 then he only owes $800 in tax.


Both deductions and credits will save you money. Now’s a good time to look at your income and expenses for 2018 to see what you can do to be eligible for the various deductions and credits available. A good place to start is the 1040 form. Look at the various credits listed, and see if any are relevant to you. Look at schedule A and see if you’re likely to have any of those deductible expenses. If your schedule A items add up to less than $12,000, then you can just use the standard deduction.


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