Tax credits and deductions can mean more money in a taxpayer's pocket. Most people only think about this when they file their tax return, but early planning can help make filing their 2021 tax return easier.
Taxpayers should be prepared to claim tax credits and deductions. Here are a few facts about credits and deductions that can help a taxpayer with their year-round tax planning:
* Taxable income is what's left over after someone subtracts any eligible deductions from their adjusted gross income. This includes the standard deduction. In fact, most individual taxpayers take the standard deduction. On the other hand, some taxpayers may choose to itemize their deductions because it could lower their taxable income.* As a general rule, if a taxpayer's itemized deductions are larger than their standard deduction, they should itemize. Also, in some cases, taxpayers may even be required to itemize. * Taxpayers can use the Interactive Tax Assistant to see what expenses they may be able to itemize. * Taxpayers can subtract tax credits from the total amount of tax they owe. To claim a credit, taxpayers should keep records that show their eligibility for it. * The American Rescue Plan made changes to several valuable tax credits including, the child and dependent tax credit, the childless earned income tax credit and the child tax credit. It's important for taxpayers to understand how these changes may affect the 2021 tax return. * Properly claiming tax credits can reduce taxes owed and boost refunds. Taxpayers can check now to see if they qualify to claim it next year on their tax return. Some tax credits, like the EITC, are even refundable, which means a taxpayer can get money refunded to them even if they don't owe any taxes.