With the new $8000 housing tax credit established by President Obama in 2009 it is important for you as a first time buyer and a potential homeowner to know what "tax credit" means. In fact, it will be helpful for to also know the difference between tax credits and tax deductions.
On the surface, tax credits are worth more money with regards to your annual IRS tax return than a similar dollar amount tax deduction.
What Is A Tax Credit?
Tax credits are direct reductions in the amount of tax you owe based on your tax bracket and your adjusted gross income to either the IRS or your state. Tax credits are up to a dollar for dollar reduction of the taxes you owe on your tax return.
For example, if you buy a home in 2009 before November 30 and you are a first time buyer you will likely qualify for a housing tax credit of up to $8000. With this particular tax credit it is a dollar for dollar credit. Your tax that you owe to the IRS will be reduced by $8000. If when you file your taxes in 2010 for 2009 and you owed the IRS $0 on your 20009 tax return then you would be eligible for up to a $8000 tax refund check all from buying a home as a first time buyer.
Some tax credits are not a dollar for dollar match. For example, if you make a charitable contribution of $200 to some qualifying non profit agency then you would receive a tax credit of $100 on your tax return. Again, if you owed $0 then you would get a refund for $100 when you filed your taxes.
What Is A Tax Deduction?
Tax deductions reduce the amount of your income that is taxable by the IRS or your state. In other words, if you were looking at a $1000 tax deduction and you were in the 15% tax bracket (you do not make a whole lot of money per year) your taxable income would be reduced by $250. So if you had an annual salary of $20,000 your taxable income with this $1000 tax deduction would be $19,750.
Tax Credits And Deductions And My Tax Return
The way that your tax return is prepared, you will make tax deduction adjustments against your income first, then you will make tax credit adjustments against the overall tax amount that you must pay based on your newly adjusted income.
Some Relevant Homeowner Tax Credits and Deductions
As a homeowner you should be aware that there are tax credits and tax deductions available to you for your mortgage interest payments to your mortgage company, your PMI payments as long as it is PMI for your primary residence or a second home, and most energy efficient home improvements.
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