Blog | Personal Finance

Tax Deductions versus Tax Credits

The cream of the crop for tax savings

Summary

• Understanding the difference between tax deductions and credits is essential for keeping more of your hard-earned money

• Surprise! The tax code was written for you, notagainstyou

• Being rich isn’t about how much you make, it’s about how much you keep

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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 said “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, rich dad 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.

This blog won’t discuss whether the current tax code is fair or unfair. Many people may find reason to complain about this tax code either way. Instead, this blog is going to focus on how anyone can reduce their tax liability by doing certain things; rather than get mad, get smart.

A couple of months ago, Rich Dad tax advisor, Tom Wheelwright, wrote 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.

Understanding tax deductions and credits

Understanding tax deductions and credits is the key to optimizing tax savings. While deductions lower your taxable income and can significantly reduce your tax liability, credits directly decrease the amount of tax you owe. Knowing how to leverage these can help you retain more of your hard-earned money.

Tax deductions

A 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.

While his tax plan for 2025 hasn’t been set in stone, The Trump Tax Plan, put into place in 2018, nearly doubled the standard deduction for all filers. If you were a single filer. or if you were married filing separately, your standard deduction for 2018 was $12,000. Joint filers had a deduction of $24,000 and heads of household got $18,000. However, that tax plan did 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.

Common misconceptions

Despite their appeal, one very dangerous misconception concerning tax credits is that they’re all refundable. In reality, some credits are non-refundable, meaning they can reduce your tax liability to zero but do not result in a refund.

Conversely, many people mistakenly believe that having a high income automatically disqualifies them from certain deductions or credits.

Misunderstanding these concepts can lead to missed opportunities or incorrect tax filings; which is why consulting a professional is paramount when filing taxes.

Consult with a pro

Tax experts can help identify tax deductions and credits that you’re simply not aware of. And to add to the already-existing complexity, the tax law is frequently changing, making it hard for the layman to keep up. It’s important to seek personalized advice, while also increasing your financial education, so that you can make sure your decisions are well-informed (and compliant).

Tax season shouldn’t be a burden

Rather than viewing the tax code as a burden, it’s beneficial to see it as a tool that, when used wisely, can significantly reduce your tax liability.

As you’re filing taxes this year, ask yourself 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.

Remember, it’s not about earning more, but about keeping more.

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