April 7, 2013 Admin | April 7, 2013 What is the difference between a tax deduction and a tax credit? Examples?
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A tax deduction reduces the amount of taxable income. A tax credit reduces a person’s tax liability. If you are in college it is possible to get the Hope Tax Credit which can directly lower your tax bill. If you have already claim this or don’t qualify you can choose to take a tax deduction which will deduct up to $4000 of qualified college expenses from being taxable income. This could change the tax bracket you are in and therefore it could also save you some on your tax bill.
Well done, Thomas. The tax deduction is nice, but only if you were planning to purchase the item or invest in it anyway. DO NOT buy “stuff” just because it is a tax deduction! Getting 20, 30 or 40 cents back on the dollar is just plain dumb unless it was a needed expense.
The tax credit can be something totally different. Not only does it save you dollar for dollar in taxes, but some tax credits like the American Opportunity Credit (previously called the Hope Tax Credit) are actually refundable. That means the government will actually pay you even if your tax is $0! Focus on tax credits (page 2 on your 1040 form) and monitor your tax deductions carefully. That is YOUR money we are talking about. Nice job, Thomas!
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Tht’as the best answer of all time! JMHO
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