This is my 1st of many posts on Income Taxes. If and when your new President updates the tax code, I will dissect it and report back what you need to know and how to plan accordingly (No Shade, but I do not subscribe to the notion that a president is necessary so I don’t claim any of them. But I’m sleep). 

Question: Have you ever noticed that people use the terms Credits and Deductions interchangeably when it comes to income taxes? Or are you someone who doesn’t know the difference? In case you’re confused as well, I came up with an easy way to remember it:

Deduct from the Rich and Credit the Poor. Or DRCP. Or DR CP.

(I know what your thinking, She’s really creative :)

You see what they did there? Yeah, you see it. They Not Low…

 Basically, Deductions are used by those with money, while Credits are usually necessary for those without money. Why you ask? 

Tax Credits are subtracted from your tax liability (the amount that you owe) while Tax Deductions are subtracted from your income (the amount that you made). This makes it possible to limit the amount of money the Poor receive (using nonrefundable credits) while simultaneously allowing the Rich to reduce their taxable income to $0 (What do you want? They authored the damn code). This results in leaving the tax revenue burden squarely on the people in between, better known as the ‘middle’ class (Thinking if I should show how this works in a video…).

Once you fully understand the distinction between the 2, it will be easy for you to make decisions based on how it will impact your bottom line on a daily basis. I’ve listed all of the existing credits and deductions below for your reference. 

CREDITS

The are 2 types of Tax Credits: Refundable Tax Credit & Nonrefundable Tax Credit
– Refundable tax credits are those that if the amount of the credit is MORE than your tax liability, the IRS sends you the difference in the form of a tax refund.

For example, you qualify for a $1,000 tax credit but owe $500 in tax for the year, so the IRS sends you a check for the remaining $500 because it is Refundable.

CAVEAT ALERT: Remember when I said that they limit the amount the Poor can get back? If that was a Nonrefundable credit in the scenario above, the IRS would have told you to ‘kick rocks’ because you can only get up to the amount you owe in tax, $500.

Fact: Most tax Credits are Nonrefundable (NOT Shocking at all).

Another example, you are eligible for a $3,500 tax Credit and your tax liability was $2,500, you can only use up to $2,500 of that credit. Nonrefundable credits can only reduce your tax liability to zero. The $1000 just disappears…. 

I kid! It doesn’t really disappear. What had happened was, Apple decided that they don’t pay taxes in this country. That’s really where the $1000 went. It’s somewhere on Apple’s balance sheet.

I’ve listed the 2016 tax credits. Use this list as a guide to help you determine what topics you should be discussing with your Tax Preparer in order to minimize your tax liability and maximize your refund. (Also, I am offering free tax planning and review to the first 10 people willing to donate $5 a month to support this blog/podcast on Patreon :)
1. Earned Income Tax Credit – for working people with low to moderate income
2. Child and Dependent Care Credit – use up to $3,000 for 1 child or $6,000 for 2 or more to
figure out the credit
3. Adoption Credit – credit for qualified adoption expenses
4. Child Tax Credit – up to $1,000 per child
5. Credit for the Elderly or Disabled – for those 65 and older or disabled
6. Premium Tax Credit (ACA) – to help low-income families with health insurance cost
7. Health Coverage Tax Credit – pays up to 72.5% of qualified health insurance premiums
8. American Opportunity Tax Credit – for 1st 4 years of education expenses, up to $2,500 a
year/per student
9. Lifetime Learning Credit – for education expenses, up to $2,000 a year
10. Residential Energy Efficient Property Credit
11. Nonbusiness Energy Property Credit
12. Low-Income Housing Credit (for Owners)
13. Mortgage Interest Credit
14. Earned Income Tax Credit
15. Saver’s Credit
16. Foreign Tax Credit
17. Excess Social Security and RRTA Tax Withheld
18. Credit for Tax on Undistributed Capital Gain
19. Nonrefundable Credit for Prior Year Minimum Tax
20. Credit to Holders of Tax Credit Bonds
21. Plug-in Electric Drive Motor Vehicle Credit
22. Plug-in Conversion Credit (Section 30B(i))
23. Alternative Fuel Vehicle Refueling Property Credit (Section 30C)
24. New Qualified Fuel Cell Motor Credit (Section 30B(b))

DEDUCTIONS  

Well, not much to discuss here. Basically, subtract the tax Deductions from your income, then calculate the amount of tax you owe. That’s it. Yup. 

And if you end up owing $0 for 30 years it’s ok. Because you’re a job creator or a Congressmen. Never mind that you create mostly minimum wage jobs (if you have yet to ship them overseas) and don’t offer health insurance (who needs insurance you can’t afford to use anyway?) You deserve all the breaks in the world. Because the Tax Code was written For You, By You. FYBY… Thank’s Raegan. 

1. Work Related Deductions [Whispers in ear *open a business and get off the W-2*]
– Deductible Business Expenses
– Standard Mileage Rates
– Home Office
– Business Use of Car
– Business Travel Expenses
– Bad Debt
– Business Entertainment Expense
– Depreciation and Amortization
2. Health Care Deductions
– Medical and Dental Expenses
– Health Savings Account (HSA)
3. Investments Deductions
– Sale of Home
– Individual Retirement Arrangements (IRAs)
– Capital Losses
4. Education Deductions
– Student Loan Interest
– Tuition and Fees Deduction
– Work-Related Educational Expenses
– Teacher’s Educational Expenses
5. Miscellaneous Deductions
– Alimony Paid
– Casualty, Disaster and Theft Losses
6. Itemized Deductions [I know what you’re thinking. You’re thinking you should buy a house because of the tax deductions… DON’T DO IT! Will explain why soon. Be patient. And don’t gamble either, the losses are not worth the deduction]
– Standard Deduction – in lieu of itemizing
– Deductible Taxes – non-business taxes
– Property Tax – personal property taxes
– Real Estate Tax – state and local government property tax
– Sales Tax – in lieu of income taxes
– Charitable Contributions – above 2% of AGI
– Gambling Loss – no more than gambling income
– Miscellaneous Expenses – unreimbursed employee expenses, tax preparation fees, etc
– Interest Expense – for mortgage and student loan debt
– Home Mortgage Interest – interest, points, and MIP
– Union/Club Expenses –
– Moving Expenses