As you plan to file your taxes this season, it's a good idea to know some of the most common terms you'll see when you're filing. Tax credits and tax deductions are two concepts you should know when you file.

So, what are the differences between these terms? Here's what you need to know when it's time to file.

What Are Tax Credits?

Tax credits are dollar-for-dollar reductions in the income taxes you owe. This means that for every dollar of credit you qualify for, your tax bill is reduced by a dollar.

Tax credits are often offered as incentives to encourage people to take specific actions, such as making energy efficiency upgrades or contributing to retirement accounts.

Some common tax credits include the earned income tax credit, the child and dependent care credit, and the American opportunity tax credit.

What Are Tax Deductions?

Tax deductions are different from credits in that they reduce your taxable income instead of your total tax bill.

For example, if you earned $50,000 and had a $1,000 deduction, your taxable income would be reduced to $49,000. This means that instead of paying taxes on the entire $50,000 earned, you'd only pay taxes on $49,000, effectively lowering your tax bill.

Common deductions include contributions to retirement accounts such as 401(k)s and IRAs, medical expenses, and student loan interest. You can also deduct any business expenses you incurred for work or other income-producing activities.

Which Option Leads to Better Results?

Tax credits are often the better option because they provide a reduction of your total tax bill. However, deductions can still save you money overall, depending on your tax rate.

Ultimately, a combination of both credits and deductions can help you save the most money on your taxes.

It's important to keep in mind that tax laws are constantly changing, so be sure to stay up-to-date on the most current regulations and take full advantage of any tax credits or deductions you may qualify for.

Talk to an Accountant About Tax Planning

If you're feeling overwhelmed by tax planning, it's a good idea to talk to an accountant. They can help you understand the difference between tax credits and deductions and help you create an effective tax plan that can save you money.

By taking the time to properly understand how credits and deductions work, you can maximize your return and ensure your taxes are filed properly. 

For more information about tax planning, contact a local company.