Everyone needs to pay income tax. It is a federal law that, if you make money during the year, you report it to the government and pay the necessary taxes. Too many people don't understand taxes or deductions and credits. Here are some things that you should know about taxes so that you don't overpay on your taxes.
What Is The Different Between Deductions and Credits?
One of the first things that people ask when they are learning about taxes is what is the difference between deductions and credits. Both of these will save you money on your taxes, but they will do so in different ways. Credits are money that you get simply for doing something. It isn't even money that you get back; it is just money. For instance, if you fall under a certain tax bracket, you might get an earned income tax credit. This is a certain amount that you get in a tax refund. You can also get tax credits for going to school, installing solar panels, or in some cases buying a house. It simply depends on the tax laws for that year and what kind of income you made throughout the year.
A deduction is different in that it lowers the overall amount that you can be taxed. When the IRS determines how much money you owe in taxes they will determine based on how much money you make. Then that will put you in a tax bracket and you will pay up to a certain amount in taxes. With a deduction it takes away how much you can pay. For example, if you are paying interest on student loans, a home loan, have children or other similar expenses, you might get a deduction. You can also get deductions for moving, paying college tuition, owning a small business, and so forth.
What Happens If You Don't Pay Your Taxes?
Every year there is a timeline that you have to pay your taxes. If it passes this date and you have not paid your taxes you could be penalized. You can file for an extension, but this is a formal process that needs to be done before the deadline to ensure that you don't get in trouble.
Also, if you pay your taxes, but don't pay the right amount, you could be fined or even sentenced to prison time. This is why it is important to hire a professional to help you with your taxes to make sure that you have done it right.
These are just a couple things you need to know about your taxes. Talk to accountants like Matthew S. Abrams, CPA to learn more.Share