Ask An Expert 2012 - Taxes: FAQ #3

FAQ #3 - What is the difference between tax credits and tax deductions?

Tax deductions reduce your taxable income, not the tax burden that you owe.

Tax credits directly reduce your tax liability. There are also either refundable or nonrefundable tax credits. Refundable tax credits are tax credits that you can get back as a refund if your credits outweigh your liabilities. With nonrefundable tax credits, you do not get a refund even if your credits are more that your tax burden.

What’s the Difference Between Itemized vs. Standardized Deductions?

When you file your taxes, you can choose between itemized and standard deductions. Itemized deductions are those that you add up yourself. The standardized deduction is a lump sum that the government allows you to take. Use whichever deduction is greater.

Are There Deductions You Can Take Without Itemizing?

Yes. The deductions that apply to students include: Student loan interest deduction -The maximum amount of student loan interest you can claim as a tax deduction is limited to $2,500 - and the Tuition and fees deduction - The maximum amount of the tuition and fees deduction you can claim is $4,000 per year.

If I’m Itemizing, How Can I Maximize My Deductions?

Itemizing your deductions can take time. However, if you’ll save more from itemizing, it can be worth it. Do your research to make sure you take every deduction allowed. Some common tax deductions include:

* Tuition and fees
* Student loan interest
* Mortgage interest
* Charitable donations
* Medical expenses (if they are more than 7.5 percent of your adjusted gross income)

What Credits Might I Qualify For?

The IRS will not tell you if you missed any, and many are available. Credits students should look out for include:

The American Opportunity Tax Credit - A refundable tax credit for undergraduate college education expenses. This credit provides up to $2,500 in tax credits on the first $4,000 of qualifying educational expenses. The tax credit is scheduled to have a limited life span: it will be available only for the years 2009 through 2012, unless Congress decides to extend the credit to other years.