Tax Break Facts
You, like many people, may not be taking full advantage of tax savings through tax exemptions, deductions and credit. You may be completely qualified for numerous tax breaks, much to your surprise. Inform yourself of all the available tax savings before you file your tax return.
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Types of Tax Breaks
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There are three main types of tax breaks: tax exemptions, tax deductions, and tax credits.
Tax Exemption
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A tax exemption is a claim you make on your tax returns that basically allows you to lower your gross income. You can claim as exemptions dependents (such as children), homestead exemption (your primary residence) and past military service as a war veteran.
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Tax Deduction
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A tax deduction also lowers your taxable income because you claim expenses or lost income on certain activities for that year. These activities include donating to a charity, enduring a house fire and starting a business.
Tax Credit
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A tax credit directly reduces your tax bill, rather than your gross income. Tax credits include driving a fuel-efficient vehicle, purchasing a home for the first time, and purchasing household appliances that are ENERGY STAR-certified.
How to Claim Tax Breaks
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When you file your yearly tax returns, keep evidence on hand to back your tax-break claims. For instance, if you purchased an ENERGY STAR appliance, enclose the receipt with your return to support your credit claim.
Warning
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Remember that it is never a good idea to claim too many savings, as this is a red flag for the IRS. This is especially true for claiming exemptions. In fact, if you claim too many exemptions on your tax return you may be sent an underpayment penalty by the IRS.
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