Andrew says his favorite platform for participating in tweetchats has become TweetChat, where all you need to do is enter the #moolah hashtag and then sign in with your Twitter account; TweetChat will display only those tweets with the #moolah hashtag, as well as always include the hashtag in your own posts. If I can get my article for tomorrow finished, I’ll be there to join the discussion!
Meanwhile, here are some great recent personal finance articles from elsewhere around the web:
First up, my pal Jim over at Bargaineering has a list of four things you shouldn’t be cheap about. Safety equipment? Don’t cut corners! Professional clothing? Invest in your future! This is an interesting topic to think about. Recently, Kris and I have discussed personal things we’re not willing to be cheap with anymore. (Travel gear, for one, and gardening equipment.)
Over at Consumerism Commentary, Flexo wrote about the advantages of buying a home with cash. This isn’t something most people can do — although I’ve recently talked with several people who’ve managed it — and it’s not something that others would want to do. Would you pay cash for a house if you could? Flexo outlines the pros and cons of such a choice.
As my financial philosophy matures, I’m more and more convinced that goals are the cornerstone of smart money management. But in order to set goals, you have to know yourself. At Personal Finance Advice, Jennifer lists five important questions you should ask about the choices you make. Will this move you toward your goals? Will it improve your life? And so on. These questions are similar to the ones I’ve learned to ask myself.
On a related note, Len Penzo has a thoughtful piece about how misplaced financial priorities lead to lame excuses. “Our spending habits reveal our priorities,” he writes. Amen!
As Tax Day draws closer, many are looking for documentation and trying to figure out whether they are taking a deduction or credit for each item that they hope will bring a tax advantage. Understanding the difference between a tax deduction and a tax credit is important — especially when you stop to consider that one is more valuable than the other.
Is That a Deduction or a Credit?
The difference between a tax deduction and a tax credit can be expressed by the way it affects your taxes.
Tax deduction:
This lowers your taxable income. Deductions are taken before your final income is figured out. There are different types of tax deductions. The first is an above the line deduction, which takes place before you figure out your adjusted gross income (AGI). You report your total income, and then subtract your deductions, arriving at your AGI.
The second group of deductions are taken from your AGI. After you have figured out your AGI, you flip over your Form 1040, and begin taking other deductions. You can choose to take the standard deduction, or you can itemize your deductions. Add up what you would itemize (using Schedule A), and see if that number exceeds the standard deduction. You want to choose the larger of your itemized deductions or your standard deduction.
Your second round of deductions are subtracted from your AGI. The result is your taxable income. In many cases, your taxable income is thousands — or even tens of thousands — less than your actual income. A tax deduction helps you by reducing the amount of money that you have to pay taxes on.
Tax credit:
After you have figured out your taxable income, you use that number to see how much you owe in taxes. Your income can be found on the tax table, and that will provide you with how much you owe. Once you know how much money you owe, you subtract the amount of money you have already paid in taxes, including money withheld from your paycheck and money paid in quarterly taxes. Now it’s time to add in your tax credits.
The great thing about a tax credit is that it directly reduces what you owe. This is a dollar for dollar reduction. If you owe $1,000, and you have $500 in tax credits, you only owe $500 total. Having a tax credits is like having a gift card meant to help you pay your taxes.
So, Which is More Valuable?
As you might imagine, having a tax credit is more valuable. A tax deduction is helpful, since it lowers your taxable income, but it isn’t quite the same. Your deduction might not be enough to knock you down a tax bracket, and it simply reduces the amount of money your taxes are figured on. A $100 tax deduction isn’t worth $100, since it might only lower your taxable income from $55,000 to $54,900. That makes a difference of $15 when you go to pay your taxes if you are married filing jointly. (According to the IRS tax table, you would owe $7,416 and $7,401, respectively.)
A credit, though, translates directly into dollars saved. If you have a $100 tax credit, you have a $100 tax credit. It means that if you owe $7,401, and you apply the credit, now you owe $7,301. Of course, if you have already paid your taxes, you could end up with a tax refund. The Earned Income Credit and some other credits can result in the government owing you money after all is said and done.
Recommended Tax Preparation Software: TurboTax | H&R Block | CompleteTax.com
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