A tax credit is much better than a tax deduction. Why?
A tax deduction reduces the amount of taxable income, whereas a tax credit reduces a person’s tax liability. A tax credit saves you dollar for dollar in taxes & some are actually refundable!
A tax credit is much better than a deduction because a credit is a specific dollar amount that comes directly off of your total tax bill, instead of just reducing your taxable income like a deduction. In fact if you have enough credits you can work your number owed all the way down to $0, and if there are refundable tax credits included, you can even get a check written to you by Uncle Sam! Here is an example with some figures…
Let’s say a single guy makes $60000 a year. Taking the standard deduction, he will pay out a total of about $9300 in taxes in 2014 (leaving out some other details to simplify).
Scenario 1: The man takes a tax deduction of $4000, dropping his taxable income to $56000, and leaving him with about $8300 owed.
Scenario 2: The man takes a tax CREDIT of $2000 (half as much as the deduction), leaving his taxable income the same but leaves his total owed at only $7300.
Nicely stated by the both of you. Bottom line? Get to know the tax code and a few of the definitions that could help you reduce the amount you pay each year. Onward!
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