Chapter 2: Deductions vs Credits

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  • Deductions reduce your taxable income
  • Credits reduce your tax

Deductions

  1. Adjustments to income
  2. Itemized deductions
  Total Income 
- Adjustment to income deduction 
= Adjusted gross income
- max(Standard deduction, itemized deductions) 
= Taxable Income
  • Itemized deductions are only useful if it's larger than the standard deduction
  • Examples of adjustments to income are contributions to a traditional IRA, contributions to a health savings account, interest on student loans.
  • Examples of itemized deductions are charitable contributions, interest on a home mortgage, medical/dental expenses

Credits

Example: $2500 for qualified education expenses

Pre-Tax Money

It just means that the money is being used for something that is deductible - you get to spend the money before you pay taxes on it and makes it more cost effective. If something is deductible or "pre-tax" is it not free -- you're just getting a "discount"

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  • 10 months ago by vince