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Not all wills are alike; there are actually four main kinds and one of them is right for you. Sure, writing a will can be an easy task to put off until “someday.” But what if the worst were to happen before “someday?” That could mean a complicated and emotionally draining legal process for your loved ones. Creating a will not only can provide peace of mind for your loved ones after you die, but it can also provide peace of mind for you right now.

The simple definition of a will is a document that states your final wishes. This alone was sufficient a century ago, when many people had limited property to pass down. But in the modern era, when “property” encompasses everything from the contents of your long-forgotten storage unit to the crypto you decided to buy on a whim, a simple will may not encompass your complex life.

Not only that, but a will is a document that only takes effect after you die. But what if you were medically unable to make decisions? Modern end-of-life documents encompass your wishes if you were medically or otherwise unable to make decisions on your own. Among these documents is one that also has the world “will” in its name.

4 Kinds of Wills

As you begin estate planning, you’ll likely come across four common types of wills. These are:

•   A simple will

•   A joint will

•   A testamentary trust will

•   A living will

Let’s look at each type of will more closely.

What Is a Simple Will?

Like the name, a simple will may be the type of will that pops into your mind when you hear the word “will.” This will can:

•   State how you want your property bequeathed upon death

•   Provide guardianship specifications for minors

Upon death, a simple will is likely to go through a legal process known as probate to divide assets. Sometimes, in the case of high-net worth individuals, probate can be expensive. (For those with complex situations and a positive net worth, a trust can help handle those what-ifs. It can transfer assets out of your estate and into the trust, which can be advantageous in terms of taxes.) But in many situations, a simple will can provide peace of mind for people in good health. Later, these individuals may want to take on more complex estate planning, but a will provides a good foundation when it comes to making sure guardians are named and property is divided according to your wishes.

A simple will can be created through online templates, and the cost can be zero dollars to several hundred dollars. More expensive online options may come with support from an attorney who can help answer simple questions. Once created, a will then needs to be made legal according to state laws. This may include signing the will in front of witnesses. You may also want to have it notarized. Having a hard copy of the will, as well as people who know how to access it in case of your death, can ensure the will is found in a timely manner if you were to die.


💡 Quick Tip: We all know it’s good to have a will in place, but who has the time? These days, you can create a complete and customized estate plan online in as little as 15 minutes.

What Is a Joint Will?

A joint will functions in much the same way as a simple will, except it is a will created by two people, usually who are married to each other. It merges their wishes into a single legal document. In many cases, this kind of will dictates that property will be left entirely to the surviving partner. Here’s the catch, though: Upon death, property will be distributed in the manner dictated by the will — the surviving person does not have the ability or authority to make changes to what the will says once the initial spouse has died.

This can sound streamlined, especially if couples were planning to leave everything to each other anyway. But this type of will can cause headaches. For example, if the surviving spouse has more children or gets remarried, it can be almost impossible to provide for additional people not named in the initial, joint will.

There could be problems even if the surviving spouse does not remarry. For example, if the marital home is considered an asset to be given to the couple’s children upon the death of both of the will’s creators, it may be impossible for the surviving spouse to sell a home to downsize.

One alternative that may suit married couples is to create two individual wills. This may provide a greater degree of flexibility and better achieve the desired effect without ruling out all of life’s what-ifs.

What Is a Testamentary Trust Will?

A testamentary trust will is usually part of big-picture estate planning. It is a document that creates a trust that goes into effect when you die. This trust can outline how certain types of property will be divided. A testamentary trust can have certain stipulations (for example, someone only inherits X piece of property when they reach Y age). This can also be used for people with minors or dependents to help ensure that wishes are followed.

What’s more, a testamentary trust can also help provide for pets. Because a pet can’t own property, naming your “fur baby” within a will can set up a legal headache. But a testamentary trust can ensure that your pet will be provided for according to your wishes.

It’s worth noting that a testamentary trust will go through the probate process, and it may not have the same tax benefits for recipients as other types of trusts. Weighing the pros and cons of different trust options can be helpful before settling on the best one for your situation.

What Is a Living Will?

This is a hard topic to think about, but what if you were in an accident and were knocked unconscious? What if you were undergoing treatment for a serious medical condition and couldn’t fully grasp the options offered to you? There’s a way to put a trusted relative or friend in the decision-making role. A living will, which is also known as an advance directive, specifies your wishes if you were medically incapacitated or unable to make or communicate decisions about your medical care. It also stipulates who your healthcare proxy, also known as a medical power of attorney, would be to make medical decisions on your behalf.

If you are creating a living will, you may also want to create a power of attorney document as well. This designates a person, who may or may not be the same person as your healthcare proxy, who has the right to make financial decisions on your behalf. Having a living will can cover unexpected situations that may occur before death and can be an integral part of end of life planning.


💡 Quick Tip: It’s recommended that you update your will every 3-5 years, and after any major life event. With online estate planning, changes can be made in just a few minutes — no attorney required.

The Takeaway

While end of life planning can be a challenging or sad endeavor, it’s an important step in making sure your assets are directed where you want them to go and that other important wishes are executed as you want. There are four main types of wills to help you legally record your plans. You’ll have options; more than one may suit your needs. And you can decide to use online services or work in person with an attorney.

In either case, making a will can give you peace of mind right now — and help smooth things along for your loved ones in the future during a difficult time.

When you want to make things easier on your loved ones in the future, SoFi can help. We partnered with Trust & Will, the leading online estate planning platform, to give our members 15% off their trust, will, or guardianship. The forms are fast, secure, and easy to use.

Create a complete and customized estate plan in as little as 15 minutes.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Tax credits and tax deductions work differently, with deductions lowering your taxable income and credits actually reducing the taxes you owe.

To be a little more specific, deductions can decrease the amount of income you have to pay taxes on, which can lower your final bill. Tax credits are a dollar-for-dollar reduction in what you owe — and might even get you a bigger tax refund.

It’s possible you may be able to claim both deductions and credits. Read on to understand more about how both options work.

What Are Tax Credits?

Tax credits represent a dollar-for-dollar reduction in your overall tax burden. They directly lower the tax amount you owe to Uncle Sam.

For example, if you owe $1,500 in taxes but qualify for a $500 tax credit, your total tax bill will decrease by $500, meaning you’ll only have to pay $1,000.

How Do Tax Credits Work?

When filing your taxes, you can use IRS resources, tax software, or a certified accountant to research tax credits for which you may be eligible. If it’s your first time filing taxes, these resources can be especially helpful.

Even if you don’t owe anything in taxes, it’s worth looking into tax credits. Why? Because some tax credits are refundable, meaning the government might owe you money:

•   Refundable tax credits allow your tax liability to go below zero. For example, if you owe $100 in taxes but receive a $500 refundable tax credit, the government will actually owe you $400.

•   Nonrefundable tax credits do not work that way, unfortunately. If you qualify for a nonrefundable tax credit, the best it can do is eliminate your tax liability (meaning you owe nothing). But even if the credit is large enough to wipe out what you owe and there’s still money left over, you don’t get to pocket that extra money.

Tax credits are not for everyone. Each credit has specific requirements to qualify.

And if you’re wondering what happens if you miss the tax deadline, tax credits would still apply for the year that you’re filing your taxes.

Common Tax Credits

Your tax software or accountant should know the full list of tax credits to look out for, and the IRS website features the whole list. (You can also learn important information from an online tax help center.)

Before diving into your taxes, however, it’s a good idea to note some of the most common tax credits for which you may qualify:

•   Earned Income Tax Credit: Commonly called by its initials (EITC), this refundable tax credit is for low- to moderate-income workers. The amount you might qualify for and your eligibility can vary depending on whether you have dependents and/or have a disability.

•   American Opportunity Tax Credit: This education tax credit is partially refundable. Students (or parents claiming a student as a dependent) can claim this tax credit for the first four years of higher education. It’s $2,500 per eligible student, but once your tax bill hits zero, you can earn 40% of whatever remains (up to $1,000) as a tax refund.

•   Child Tax Credit: Even if a child isn’t enrolled in higher education, parents have access to a handy tax credit. The Child Tax Credit is a refundable tax credit for parents (with dependent children) who meet income requirements.

•   Child and Dependent Care Credit: Parents have access to yet another potential tax credit, this time for those who pay for babysitters or daycare. The credit amount depends on such factors as your income, child care costs, and number of children requiring care.

You can use tools on the IRS website to discover if you qualify for these and other tax credits.

What Are Tax Deductions?

Tax deductions are another way to reduce your tax burden, but they work differently. While a tax credit discounts your final tax bill after all the calculations, a tax deduction reduces the amount of income eligible for taxes.

The more deductions you have, the less money you have to pay taxes on. This can result in a lower overall tax bill, but it cannot result in a tax refund.

Recommended: What Triggers an IRS Audit?

How Do Tax Deductions Work?

Let’s look at an example to understand how tax deductions reduce what you owe:

If you made $100,000 in a given year, you would owe 24% in federal taxes based on your marginal tax bracket. But if you have $10,000 in tax deductions, you would lower your taxable income to $90,000, which puts you at both a lower base to calculate taxes ($90K vs. $100K), and you would be in the 22% tax bracket, which this year is capped at $95,375 for single filers.

As you can see, when calculating how much a tax deduction will save you, it’s important to know which tax bracket you’re in — your tax bracket represents the percentage at which your income could be taxed. In general, the more money you make, the higher the tax rate.

Common Tax Deductions

Nearly every tax filer is eligible for the standard deduction. Without inputting any information accounting for business expenses, medical costs, charitable contributions, student loan interest payments, and other eligible deductions, you can simply subtract the standard deduction amount from your taxable income.

For the 2023 tax year (which will be filed in April of 2024), the standard deduction is:

•   $13,850 for single taxpayers (and married, filing separately)

•   $27,700 for married taxpayers filing jointly

•   $20,800 for heads of household.

Many people choose to take the standard deduction, but if you qualify for various deductions that would amount to more than the standard deduction, it’s worth itemizing your deductions.

Working with a personal accountant or tax preparation software may be your best bet for determining which deductions you qualify for. Here are some of the most common types of deductions:

•   State and local taxes

•   Business expenses (if you are self-employed)

•   Mortgage interest

•   Property taxes

•   Qualifying medical expenses

•   Charitable contributions

•   Student loan interest.

You can explore even more tax deductions on the IRS website.

If you run your own business, it’s wise to look into common tax deductions for freelancers.

Pros and Cons of Tax Credits

Tax credits are largely a good thing, as they reduce your overall tax burden. But they also have some drawbacks. Here’s a closer look at the pros and cons:

Pros

First, consider these upsides of tax credits:

•   Reduces your tax bill

•   May result in a refund

•   Often designed for moderate- to low-income families.

Cons

Next, the potential downsides of tax credits:

•   Strict eligibility requirements

•   Can delay your refund when you claim them.

Recommended: How to File for a Tax Extension

Pros and Cons of Tax Deductions

Similarly, tax deductions serve a useful purpose in filing taxes, but they also have their own set of pros and cons.

Pros

Here are the potential advantages of tax deductions:

•   Reduces your tax bill

•   The standard deduction is easy to claim

•   Useful for self-employed individuals with business expenses.

Cons

Also be aware of the possible downsides:

•   Lots of paperwork (itemized deductions)

•   Weighing the standard vs. itemized deduction can be complicated

•   Won’t generate a refund.

Tax Credits vs Deductions: What’s the Difference?

Let’s break down the differences between tax credits and tax deductions in chart form:

While nearly everyone can qualify for the standard deduction, tax credits can actually be the more effective way to lower your tax bill. But the best part? You can utilize both tax strategies when you file.

Tips for Using Tax Credits and Deductions

Preparing to file your taxes? Here are some tips for using tax credits and deductions:

•   Research eligibility requirements online: The IRS website has useful tools to help determine if you qualify for specific tax credits and deductions.

•   Gather all your paperwork: Taxes require a lot of forms, documents, and receipts. When claiming credits and deductions, it’s important to have the paperwork (whether printed or digital) to prove your eligibility.

•   Consider using tax software or an accountant: Taxes can be overwhelming. If your situation is complex (maybe you are confused by, say, your payroll deductions), you may benefit from tax software (TurboTax, H&R Block, and TaxSlayer are popular brands) or a tax professional.

The Takeaway

Tax credits and tax deductions can both lower your overall tax burden. Tax credits reduce what you owe dollar-for-dollar, while tax deductions reduce the amount of income you owe taxes on. If you’re eligible, you can take advantage of both tax strategies when you file.

While you are getting your taxes organized, don’t overlook the value of a banking partner that makes it easy to manage your finances.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

Between a tax deduction and tax credit, which lowers your bill more?

A tax credit lowers your tax bill dollar-for-dollar and may even result in a refund. A tax deduction only reduces the amount of money you owe taxes on. For example, a $1,000 tax credit takes $1,000 off your tax bill. A $1,000 tax deduction reduces your taxable income by $1,000; the actual reduction in tax depends on your tax bracket.

Do more people utilize tax credits or tax deductions?

Most tax filers can claim the standard deduction, but not everyone qualifies for tax credits. So it is more likely that you’ll use a tax deduction on your tax return than a tax credit. That said, it is possible to use both credits and deductions to lower your tax bill.

Can I claim both deductions and tax credits?

Yes, you can claim both tax deductions and tax credits on your tax return, as long as you qualify for the deductions and credits you claim.

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