Do you know the difference between a tax deduction and a tax credit? Both will lower your taxes but there is a difference between the two.
Deductions will reduce your taxable income. Dependent upon your tax bracket, each dollar in deductions offsets your taxable income 15-50 cents.
Credits can be more valuable to you than a deduction because for every dollar you have in a credit you also have one dollar less in taxes to pay.
Here are a few other saving tips to consider when you prepare your income taxes.
Retirement contributions. A traditional IRA is funded with pre-tax dollars. Therefore, every dollar that you contribute is a dollar that you get to deduct from your income for the year. Even if you open and fund a retirement account in 2015, any contributions made before April 2015 may be credited to the previous year’s contributions. In 2014, the maximum contribution allowed is $5,500 and $6,500 for those older than 50 years of age.
Self-employment options. If you are self-employed you have several retirement account options available to you. The two most common options are the One-Participant 401k (or the solo/self-employed 401k and the Simplified Employee Pension (SEP) IRA account. Any contributions made before April 15th using these accounts may also be applied to the previous year’s contributions. These retirement accounts will have higher contributions limits than that of the standard IRA’s. Being self-employed, if you can afford it, you can fund an SEP IRA, Solo 401k, and a Traditional IRA.
At Summit CPA we can help your get on the right personal and business financial track. We also have the capability to assist you virtually anywhere in the USA. If you need assistance, contact our office at (260) 497-9761 to schedule an appointment with our advisors.