July 16, 2013
What is the difference between a tax credit and a tax deduction? Why should you care?
What is the difference between a tax credit and a tax deduction? Why should you care?
Tax deductions reduce taxable income. Tax credits directly reduce a person’s tax liability. If was ever given a choice between a $100 tax deduction and a $100 tax credit, I would want the credit. This is because the tax credit would reduce my tax dollar-for-dollar. I should care, because now I know which one would save me the most money when it comes to taxes.
Right again, Katherine. Let’s recap. Tax credits provide a dollar for dollar reduction in your taxes. That is GREAT. Tax deductions provide a reduction in your taxes based on your marginal tax rate. If you are paying 30% in state and federal taxes combined then you would be getting 30 cents back on every dollar spent. That is okay IF you were going to buy the item anyway. DO NOT buy things because of the tax deduction. Example: Give me $1000 and I will happily give you $500 back. That is the equivalent of a 50% tax deduction. Proceed carefully on the tax deduction front.