26 Oct Tax credits versus tax deductions
Q. On the veteran’s tax exemption, everything I am reading suggests this is not really a tax exemption, but more of a tax deduction. A tax exemption would mean any New Jersey income tax up to $3,000 would be returned and that doesn’t seem to be the case. Am I reading that right?
A. It seems that you’re getting confused between exemptions and deductions.
A tax exemption allows for a portion of your income to not be taxed, said Len Nitti, a certified public accountant with Wilkin & Guttenplan in East Brunswick.
“Essentially, an exemption is a tax deduction without having to incur an expense,” Nitti said. “Common types of exemptions in New Jersey are personal exemptions, dependency exemptions, retirement income exemptions and now the veteran’s exemption.”
You don’t get money back — a refund — if your exemptions and deductions exceed your income.
But if your income exceeds your exemptions and tax deductions, your income becomes subject to tax, Nitti said.
A tax credit, on the other hand, is a dollar-for-dollar reduction of your tax bill.
“Some tax credits that New Jersey offers are the earned income tax credit, credit for taxes paid to other states and a credit for real estate taxes/rent paid — where a $50 credit exceeds the benefit for a real estate tax deduction,” Nitti said.
Hope that clarifies things for you.
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The post was originally published in October 2017.NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.