28 Jul How Tax Credits Work

Tax Credits and Tax Deductions

At Avalon Accounting we get a great many questions about tax credits and tax deductions. The average individual doesn’t have a good grasp of the difference between these two important areas of tax law. For most small business owners, tax time can be highly stressful. We all want to do the right thing where taxes are concerned, but pay as little as possible each year. A full understanding of how tax credits work can help you do this.

Examples  of Tax Credits

The simplest way to explain what a tax credit is may be by example. Tax credits are subtracted directly from your tax liability. They reduce your tax liability dollar for dollar. For example, in the 15% tax bracket, a $1000 tax credit will reduce your tax liability by $1000. On the other hand, tax deductions reduce the tax liability by the amount of the deduction times the tax rate. Again, in the 15% tax bracket, a $1000 tax deduction reduces your taxable income by $1000. This results in a reduction of $150 in tax payments.

Tax credits are more valuable simply because they offset your actual taxes directly. The bottom line is that they save you money and they can be refundable or nonrefundable. A refundable tax credit can help you to receive a refund when the credit exceeds the amount of the tax liability. For example, let’s say your tax liability is $3000 and you have a refundable tax credit of $4000. You will receive a $1000 refund. If the tax credit was nonrefundable, then your tax liability will be reduced to zero, but you will not receive any refunds.

Avalon Accounting assists small business owners throughout the South Florida area with helpful tips on how to pay less taxes. We help you structure your business along with large purchases in order to reduce your overall tax liability. We can help with investment advice and when you are ready to expand the business, we’ll be there to make sure all the paperwork is financially sound.

Avalon Accounting partners with businesses everyday throughout the South Florida area. Our skill and experience gives us the ability to be more than just an accountant. We work with you to establish a strong financial future.