What Is a Tax Credit vs. Tax Deduction?

Money

Tax season is here. As a result, taxpayers should be brushing up on their tax terms so that they can maximize their chances of getting the best results from their tax filing. One excellent example of potential issues is the difference between tax credits and tax deductions, which has been known to confuse a lot of people out there.

What Is a Tax Credit?

In short, a tax credit reduces the amount of taxes that the taxpayer is supposed to pay. As a result, tax credits aren’t included in the calculations until the tax payer has already calculated their tax liability. Generally speaking, interested individuals will separate tax credits into refundable tax credits and non-refundable tax credits. The first kind of tax credit is particularly valuable because they can benefit from them even if they have no tax liability whatsoever. In contrast, the second kind of tax credit can reduce the taxpayer’s tax liability to zero but will have no further effect.

There are numerous tax credits out there, but some of them are much better-known than others. For example, the Earned Income Tax Credit is meant to help out families with either low or moderate income. The maximum amount varies, but the more important part is that what taxpayers will receive is based on various factors such as marital status, number of children, and household income. In contrast, the American Opportunity Tax Credit is meant to help out students in the first few years of their undergraduate education by easing the cost of books, supplies, tuition, and more; while the Lifetime Learning Credit is broader in nature in that it can be used to cover relevant expenses for undergraduate, graduate, and even professional degree courses. Other famous tax credits include but are not limited to Saver’s Credit, Foreign Tax Credit, and Child Tax Credit.

What Is a Tax Deduction?

Unlike tax credits, tax deductions reduce the amount of the taxpayer’s taxable income rather than the amount of taxes that they are supposed to pay. As a result, tax deductions aren’t as good as tax credits on a dollar-for-dollar basis but are nonetheless very useful to have. For those who are curious, tax deductions can be divided into two categories as well, with one being itemized deductions and the other being above the line deductions. The difference between the two is that itemized deductions take away from taxable income while above the line deductions take away from adjusted gross income, which is gross income minus a select set of tax deductions. This is important because adjusted gross income determines whether taxpayers can gain access to various tax credits and tax deductions.

Of course, there are some tax deductions that are very well-known as well. Some examples include but are not limited to medical expenses, mortgage interest, student loan interest, property taxes, and charitable contributions.

What Is the Difference Between Tax Credits and Tax Deductions?

Summed up, tax credits are used to reduce what a taxpayer has to pay in taxes, while tax deductions are used to reduce the amount of a taxpayer’s income that will be taxed at their marginal tax rate. Comparing the two can be interesting, but under normal circumstances, people should be making use of both tax credits and tax deductions to minimize their tax liability as much as possible. Otherwise, they run a high risk of missing out on some good opportunities, which can come with high costs because of that.

Theoretically, interested individuals can look up both tax credits and tax deductions on their own. After all, there is a lot of interest in such matters, meaning that there are a lot of resources out there that exist for the sake of helping out similar people in similar situations. However, if interested individuals want to be sure, they might want to consult a tax preparation professional who specializes in helping out clients in similar circumstances. Yes, such help won’t come free of charge in most cases, but having that kind of expertise and experience can enable interested individuals to get help for not just their tax credits and tax deductions but also other parts of their taxes. Something that can make a huge difference for the final outcome for a lot of taxpayers out there.


Add Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Away
20 Things You Didn’t Know about Away
Steph Korey
10 Things You Didn’t Know about Away CEO Steph Korey
JD Byrider
How JD Byrider Became a Leading Auto Giant
George Carlin
20 George Carlin Quotes That Apply to Business
California
How to Apply For Unemployment in California
Pharmaceuticals
Is Denali Therapeutics a Solid Long Term Investment?
New York
How to File For Unemployment in New York
Ollie's Stock
Is Ollie’s Stock a Solid Long Term Investment?
Deschutes River
The 20 Best Things to Do in Bend, OR, for First Timers
Costa Di Mare
The 20 Most Romantic Restaurants in the United States
Ocean Drive
The 20 Best Things to do in Newport, RI For First Timers
Lake Merritt
The 20 Best Things to Do in Oakland, CA for First Timers
2020 Audi Q7 55 side
10 Things You Didn’t Know About the 2020 Audi Q7 55
Gumpert Nathalie EV
10 Things You Didn’t Know About the Gumpert Nathalie EV
Volvo's Polestar
Volvo’s Polestar May Be the Four-Door Electric Car of the Future
2021 Genesis GV80
10 Things You Didn’t Know About the 2021 Genesis GV80
I.N.O.X. Professional Diver
The 20 Best Swiss Army Watches of All-Time
Orrery Tourbillon REF. 2GGBP.U01A
The 10 Best Graham Watches Money Can Buy
Junghans Meister Pilot Chronscope Watch Black Dial Numerals 0273590.00
The 10 Best Junghans Watches Money Can Buy
10 Things You Didn’t Know about Moller Watches
Steven Crowder
How Steven Crowder Achieved a Net Worth of $3 Million
Don Lemon
How Don Lemon Achieved A Net Worth Of $10 Million
Sting
How Sting Achieved a Net Worth of $400 Million
Brooke Baldwin
How Brooke Baldwin Achieved a Net Worth of $1.5 Million