Business & Financial Solutions
TAX HELP SERVICE AND PREPARATION
Every tax season, Maryland residents face the same critical question: how can they legally minimize their tax burden and keep more of their hard-earned money? The answer often lies in understanding two powerful tools in the tax code—credits and deductions—yet many taxpayers confuse these distinct benefits or fail to maximize their potential savings.
As experienced CPAs serving clients throughout Frederick, Rockville, McLean, and Plano, the team at Business and Financial Solutions (BFS) has witnessed countless instances where taxpayers leave money on the table simply because they don’t fully grasp the difference between tax credits and tax deductions. This confusion can cost Maryland families hundreds or even thousands of dollars each year.
This comprehensive guide will demystify tax credits and deductions, explain how each impacts your tax liability differently, and highlight specific Maryland tax benefits that could significantly reduce what you owe. Whether you’re a small business owner in Frederick or a growing family in Montgomery County, understanding these concepts is essential for smart tax planning.
Tax deductions reduce your taxable income—the amount of income subject to taxation. Think of deductions as discounts on your income before calculating what you owe. When you claim a deduction, you’re essentially telling the IRS or Maryland Comptroller that a portion of your income shouldn’t be taxed because it was used for qualified expenses.
The value of a deduction depends on your tax bracket. If you’re in the 22% federal tax bracket and claim a $1,000 deduction, you’ll save $220 in taxes. Maryland residents in the state’s 5.75% tax bracket would save an additional $57.50 on that same deduction at the state level.
Common federal and Maryland deductions include mortgage interest, charitable contributions, state and local taxes (up to $10,000), medical expenses exceeding 7.5% of adjusted gross income, and business expenses for self-employed individuals. Maryland also offers unique deductions, such as contributions to Maryland 529 college savings plans and certain retirement income exclusions for seniors.
Tax credits directly reduce your tax liability dollar-for-dollar, making them significantly more valuable than deductions. If you owe $3,000 in taxes and qualify for a $1,000 tax credit, your tax bill drops to $2,000—regardless of your income level or tax bracket.
Credits come in two varieties: refundable and non-refundable. Non-refundable credits can only reduce your tax liability to zero, while refundable credits can generate a refund even if you don’t owe any taxes. The federal Earned Income Tax Credit and Additional Child Tax Credit are examples of refundable credits that benefit many Maryland families.
Maryland offers several valuable state tax credits, including the Earned Income Tax Credit (matching 50% of the federal credit), the Child and Dependent Care Credit, and various business-related credits for companies operating in the state. These credits can substantially reduce your Maryland tax liability when properly claimed.
The fundamental difference lies in how each affects your final tax bill. Deductions work by lowering your taxable income, which then reduces your tax based on your marginal tax rate. Credits, conversely, provide a direct reduction of your tax owed, making them inherently more valuable on a dollar-for-dollar basis.
Consider this example: A Frederick family earning $80,000 annually faces a choice between a $1,000 deduction and a $1,000 credit. The deduction would save them approximately $220 in federal taxes (assuming a 22% bracket) plus $57.50 in Maryland state taxes. The credit, however, would save them the full $1,000—nearly four times the value of the deduction.
Deductions often have broader eligibility requirements but may be subject to income phase-outs. The standard deduction is available to all taxpayers, while itemized deductions require sufficient qualifying expenses to exceed the standard deduction threshold ($13,850 for single filers and $27,700 for married filing jointly in 2023).
Tax credits typically have more specific eligibility criteria. The Child Tax Credit requires dependent children under 17, while education credits demand enrollment in qualifying educational institutions. Many credits also phase out at higher income levels, making early tax planning essential for maximizing benefits.
Maryland’s Earned Income Tax Credit provides substantial relief for working families, offering 50% of the federal EITC amount as a refundable state credit. For a family with three children qualifying for the maximum federal EITC of $7,430, this translates to an additional $3,715 in Maryland tax benefits.
The state’s Child and Dependent Care Credit helps working parents offset childcare costs, providing up to 32.5% of the federal credit amount. Maryland also offers unique credits for electric vehicles, solar energy installations, and preservation of historic properties, particularly relevant for Frederick County’s numerous historic homes.
Maryland allows several deductions not available at the federal level. Taxpayers over 65 or those who are blind receive an additional $1,750 personal exemption. The state also provides a pension exclusion of up to $34,300 for retirees, depending on age and income levels.
Contributing to Maryland’s 529 college savings plans offers a valuable deduction of up to $2,500 per beneficiary, per contributor. For grandparents contributing to multiple grandchildren’s education funds, this can create significant tax savings while building educational nest eggs.
Effective tax planning isn’t a once-a-year activity confined to April. Meeting with your CPA quarterly allows you to adjust withholdings, time deductible expenses, and ensure you’re capturing all available credits. BFS professionals recommend maintaining organized records throughout the year, particularly for business owners tracking deductible expenses.
Strategic timing can maximize deductions. Consider bunching charitable contributions in alternating years to exceed the standard deduction threshold. Accelerating or deferring income and expenses near year-end can optimize your tax bracket and credit eligibility.
Tax laws change frequently, and Maryland’s tax code adds another layer of complexity. Professional guidance ensures you’re not missing valuable opportunities or making costly mistakes. A CPA can identify credits and deductions specific to your situation, from home office deductions for remote workers to specialized business credits for Maryland employers.
The professionals at BFS stay current with federal and Maryland tax law changes, helping clients navigate new provisions like the expanded Child Tax Credit or changes to business depreciation rules. This expertise proves particularly valuable for Frederick area businesses navigating both Maryland and federal tax obligations.
Many taxpayers claim the standard deduction without calculating whether itemizing would provide greater benefits. Medical expenses, charitable giving, and state taxes might exceed the standard deduction, especially for homeowners with significant mortgage interest.
Failing to consider income limits for credits costs taxpayers significant savings. Some credits phase out gradually, allowing partial benefits even at higher income levels. Understanding these thresholds helps with year-end tax planning strategies.
Documentation requirements differ between credits and deductions. While charitable deduction receipts might suffice for deductions, credits often require specific forms or certifications. The American Opportunity Tax Credit, for instance, requires Form 1098-T from educational institutions.
Understanding the distinction between tax credits and deductions empowers Maryland taxpayers to make informed financial decisions throughout the year. While deductions reduce taxable income based on your tax bracket, credits provide dollar-for-dollar tax savings, making them particularly valuable for eligible taxpayers.
Maryland residents benefit from numerous state-specific opportunities, from the generous Earned Income Tax Credit to retirement income exclusions. Maximizing these benefits requires careful planning, thorough documentation, and often, professional guidance to navigate the complexities of federal and state tax codes.
Don’t leave money on the table this tax season. The experienced CPAs at Business and Financial Solutions are ready to help you identify and claim every credit and deduction you deserve. With offices in Frederick, Rockville, McLean, and Plano, BFS provides personalized tax planning strategies tailored to your unique financial situation. Contact BFS today to schedule your tax planning consultation and discover how much you could save.
Q: Can I claim both tax credits and tax deductions on the same tax return? A: Yes, you can and should claim all credits and deductions for which you qualify. They work together to minimize your overall tax liability—deductions reduce your taxable income first, then credits reduce your calculated tax.
Q: Are Maryland tax credits and deductions the same as federal ones? A: No, Maryland has its own set of credits and deductions separate from federal benefits. Some mirror federal provisions (like the EITC), while others are unique to Maryland. You’ll need to qualify separately for each.
Q: What happens if a tax credit exceeds my tax liability? A: For non-refundable credits, any excess is lost. However, refundable credits like the Earned Income Tax Credit can generate a refund even if you owe no taxes, making them especially valuable for lower-income taxpayers.
Q: Should I always itemize deductions if they exceed the standard deduction? A: Generally yes, but consider the time and documentation required. If itemized deductions only slightly exceed the standard deduction, the additional effort might not be worthwhile. A CPA can help determine the best approach.
Q: How do I know which Maryland tax credits I qualify for? A: Eligibility varies by credit and often depends on income, filing status, and specific circumstances. Consulting with a Maryland CPA ensures you identify all applicable credits and properly document your eligibility.
Last Updated: August 2025
