As the new year gets underway in earnest, tax season is heating up. Many people are considering how they might end up with a tax rebate. A tax rebate is the refund of money that you overpaid to the IRS. If you had too much withheld from your paycheck, or paid more in quarterly taxes than you owe to the government, then you are due a rebate. But how do you get this rebate?
How Your Tax Refund is Figured
Most of us know “tax rebates” as tax refunds. Your tax refund is figured, by you (or a tax preparer), with the help of the Form 1040 — and its accompanying Forms and Schedules. For those with businesses, additional paperwork is needed to help determine your tax liability. Through a series of adjustments made to your income, and through the application of credits to what you should be paying in taxes, you can determine whether you are owed a tax rebate.
Deductions vs. Credits
One of the most important distinctions associated with figuring out whether or not you are eligible for a tax rebate is the distinction between tax deductions and tax credits. These are two different adjustments made on your tax return.
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- Tax Deductions: Reduce your income. You can use such items as medical costs paid, charity donations, moving expenses, mortgage interest paid, and certain retirement account contributions to reduce your taxable income. This is done in two stages. First of all, there are tax deductions that you take on the front of your Form 1040. These items take your gross income and reduce to your adjustable gross income (AGI). Next, you flip over your tax return form and figure out other deductions. You can take the standard deduction, or you can itemize your deductions. You subtract these deductions from your AGI to arrive at your taxable income. It is possible that your taxable income is tens of thousands of dollars less than your actual income.
- Tax Credits: After you figure out your taxable income, it is time to determine what you owe in taxes. The IRS provides a tax table that can help you figure out how much you owe. You enter that amount on your tax return. Then you look at what you have already paid in taxes. This is the money that is withheld from your paycheck, or that you pay on a quarterly basis. If the taxes you owe amount to $2,000, and you have already paid $2,500 via withholdings, then you will get a tax rebate. However, it doesn’t stop there. You still get to apply tax credits. Tax credits reduce what you owe dollar for dollar. Many have compared the way they work to the way a gift card works, applying a specific amount to a purchase. You might have a child tax credit, or an Earned Income Credit coming. There might be caregiving credits, or credits related to education. There are even tax credits available for energy efficient home improvements. If you owe money, each tax credit reduces what you owe. If you are already due a rebate, a tax credit increases the amount of that rebate.
Taking Deductions and Credits
You should have proper documentation to back up the deductions and credits you plan to apply on your tax return. Keep good records so that if you are audited, you can show that you are entitled to the tax rebates you have received. A tax professional can help you determine what you are eligible for so that you can get the best tax rebate legally allowed.
Miranda Marquit is a journalistically trained freelance writer and professional blogger working from home. She is a contributor for Mainstreet.com, Personal Dividends and several other sites. Miranda is not affiliated or endorsed by LPL Financial. The opinions voiced in this material are for general information and are not intended to provide specific advice and/or recommendations for any individual.