Tax Deductions versus Tax Credits

Posted on April 10, 2022 by Dr. David Edward Marcinko MBA MEd CMP™

By Staff Reporters

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What is a tax deduction?

A deduction reduces the amount of income you pay taxes on, which means you could pay less in taxes. You subtract deductions from your income before calculating how much taxes you owe. How much a deduction saves you depends on your income tax bracket.

To calculate how much a deduction could reduce your taxes, you multiply the amount of the deduction by your marginal tax rate. For example, if a deduction is worth $5,000 and you are in the 10% tax bracket (the lowest), the deduction would reduce your taxes by $500.

A deduction’s value to you is tied to your tax rate. So if you’re paying a higher tax rate, you can reap more of a deduction’s benefit. The lower your tax rate, the less benefit a deduction will have for you. Imagine that you take a $5,000 deduction, but you’re in the 35% tax bracket — the second highest. Now you’re saving $1,750 in taxes.

CITE: https://www.r2library.com/Resource/Title/082610254

What is a tax credit?

On the other hand, a credit is a dollar-for-dollar reduction in the amount of tax you owe. For example, if you qualify for a $1,000 tax credit of some kind and owe $5,000 in taxes, that credit will reduce your tax burden to $4,000.

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But – Do Not Claim Too Many Tax Deductions

Deductions are enticing to taxpayers because they can reduce the amount of your income before you calculate the tax you owe, which in turn might significantly lower how much you have to pay in taxes or increase your refund. But that doesn’t mean you should go wild writing things off on your tax returns, as experts say claiming too many deductions is the most common reason people end up getting audited by the IRS.

Don’t try writing off deductions that are no longer accepted by the IRS. The tax code has changed over the years, and there are some things the tax agency no longer recognizes. You should remember that some of the tax write-offs were terminated by the IRS, including deductions on alimony, moving expenses, and any expenses related to investing, hobbies, and tax preparation.

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Health Entity-Related Tax Credits

Posted on December 15, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Some Unique Tax Basics for the Industry

By Edwin P. Morrow; III, JD, LLM

Staff Writers

In addition to the usual business deductions, medical professionals and those in healthcare should be aware of certain unique investment related tax credits. Much like personal credits, most of these credits are non-refundable, but may be allowed as carry forwards to the next year, or carry backs to prior years. 

Welfare to Work Credit

This credit is for medical employers who hire long-term family assistance recipients. It may be for up to 35% credit on applicable first year wages and 50% credit on second year wages. [See Form 8861] “Welfare to Work Credit”, for more details

Increased Research Expenditures Credit

This credit is applicable to health entity owners and startups. Research expenditures eligible for this credit must be to discover information that is technological in nature and intended for development of a new or improved business component. The research must relate to new or improved function, performance, reliability or quality. [See IRS Form 6765] “Credit for Increasing Research Activities”, for more details 

Disabled Access Credit

This credit is for eligible small medical and health entities that make a business accessible to disabled people. The credit may be 50% of qualifying expenditures. To be eligible, a small business must have gross receipts of $1 million or less, or have had no more than 30 employees during the preceding tax year. Eligible expenditures may include physical changes to the building, changes to the communication system, providing interpreters, acquiring or modifying equipment, or other accommodations for disabled access. [See Form 8826] “Disabled Access Credit”, for more details.

Empowerment Zone Employment Credit

This credit is to encourage employment in “empowerment zones” established by the Secretary of Housing and Urban Development (HUD) and the Secretary of Agriculture. [See Form 8844] “Empowerment Zone Employment Credit”, for more details.

Indian Employment Credit

A credit of up to 20% of applicable in wages and health insurance benefits paid to qualified health employees who are enrolled members of an Indian tribe or their spouses.  Substantially all of the services performed must be within an Indian reservation and the employee must live on or near the reservation [See Form 8845] “Indian Employment Credit”, for more detail

Orphan Drug Credit

This credit is for qualified clinical drug testing expenses.  This credit may be for up to 50% of expenses incurred [See Form 8820] “Orphan Drug Credit”, for more details.

Assessment

What credits did we miss; please advise?

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated. Have you used any of these tax credit strategies in the past?

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