Certainly the topic of income tax has been a major one in the news as of late with Congress working hard to get a new tax bill passed before it takes the winter holiday break. Many people in Minnesota are understandably curious to learn more about how the new guidelines may affect them and their ability to deduct some expenses from their taxes or to claim certain tax credits. Before learning about the specific details, however, it is important to be educated about the difference between tax deductions and tax credits.
As explained by Nerd Wallet, both deductions and credits can help taxpayers lower their tax burden but they do this in very different ways. A tax deduction allows people a way of essentially reduce their taxable income. A tax credit, on the other hand, allows people a way of directly reducing the amount of tax that they owe. The deduction happens before the tax amount is ever calculated. The credit is given after the tax is calculated.
According to the Internal Revenue Service, taxpayers may or may not get the full amount of a tax credit. This is because some credits are non-refundable meaning that if a person owes less in tax than the value of the credit, only the amount up to the tax owed is allowed. A refundable credit may result in a refund depending upon the final tax assessment.
As more is learned about the new tax code, Minnesota taxpayers will want to carefully track what is and is not deductible and what credits are available. There are many nuances in the tax law that may contribute to someone being accused of fraud unknowningly.