Blog | Personal Finance

Tax Deductions versus Tax Credits

The cream of the crop for tax savings

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The tax law was not written for the rich; it was written for anyone who is financially educated.

Robert Kiyosaki once told me, “When I was a young boy, my rich dad told me, ‘You can make a lot of money and still not be rich.’”

By this, he meant that you could have high income but also low financial intelligence. Many high earners lose their money to two things: expensive liabilities—like fancy cars, long vacations, and McMansions—and taxes.”

I’m not here to persuade you to believe that the current tax code is fair or unfair. Many people may find reason to complain about this tax code either way. I’m here to tell you that anyone can reduce their tax liability by doing certain things. Rather than get mad, get smart.

A couple of months ago, I told you about the two rules to put money in your pocket. Now, all you have to do is change your facts. As you consider how to reduce your taxes, every dollar, pound or euro you earn can increase your taxes, and every dollar, pound or euro you spend can decrease your taxes.

Below is your first lesson in taking advantage of the tax code that will help you decrease your taxes.

Tax Deductions

Tax deduction is a reduction of income that is able to be taxed and is commonly a result of expenses, particularly those incurred to produce additional income. Tax deductions are a form of tax incentives, along with exemptions and credits. The difference between deductions, exemptions and credits is that deductions and exemptions both reduce taxable income, while credits reduce tax.

The new Trump Tax Plan, put into place in 2018, nearly doubled the standard deduction for all filers. If you’re a single filer. or if you’re married filing separately, your standard deduction for 2018 is $12,000. Joint filers have a deduction of $24,000 and heads of household get $18,000. However, the new tax plan does remove or drastically change some of the popular tax deductions from previous years.

Some popular tax deductions are:

  • Estate tax deduction
  • Mortgage Interest deduction
  • Property tax deduction
  • Moving expenses deduction
  • Home equity debt

Tax Credits

When you do certain things that the government wants you to do you get an immediate reduction in your taxes it’s called a tax credit. All you have to do is learn which things the government wants you to do and know that there is a tax credit available for doing them. You might even be doing these things without knowing there is a credit available.

Tax credits are the cream of the tax savings crop because it offsets your taxes dollar for dollar. It’s not like a deduction, which only reduces your taxable income. It goes directly against your taxes. So if you have a tax credit of $1,000, it reduces your taxes by $1,000, no matter what your tax bracket is.

Some of the more popular tax credits are:

  • Family credits
  • Education credits
  • Working-poor credits
  • Charity Credits
  • Investment Tax Credits

Tax credits are a direct subsidy. The reason that the government doesn’t send you a check is that it’s much simpler for them if you claim the credit on your income tax return, instead. And, of course, subsidies are never as politically correct as tax credits. In addition, not everyone has the financial education to claim the credits, so the government isn’t out as much money as they would be if they sent you a check directly.

Figure out how you can be someone who either grows the economy or creates jobs…or both. By doing so, you will benefit from the very behaviors the tax code is designed to reward. The economy and your wallet will be better off for it.

To learn more about how to take advantage of tax credits, get my book, Tax-Free Wealth, now.

Original publish date: March 04, 2019

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