What’s the Difference Between a Tax Deduction and a Tax Credit?

December 13, 2011  |  
There are very few constants in this world as infallible as death and taxes. Honestly, it’s hard to tell which one hurts more. Your paychecks don’t look so great when you realize that for every dollar you earn, you owe a percentage of it to Uncle Sam. Most of us hear that we can save money on our tax bills and think “I’ll take it.” But, before you get excited about a tax break, you need to know whether it’s a deduction or a credit. Each one affects your tax bill differently and one is more valuable than the other.
A tax deduction is an amount pf money you can subtract from your total taxable wages due to a relevant tax law. You can’t deduct more than 100 percent of your taxable wages, though. Taxable wages are the total amount of money you earned that year that IRS takes a percentage of. A common tax deduction is the one you might get if you used part of your home for business use that year. On the other hand, a tax credit is an amount of money the IRS credits to your tax bill based on an applicable tax law. The most commonly used tax credit is always the child tax credit, which gives you $1000 per qualifying child you claim.So what’s the difference. Well the primary difference is that a tax deduction is subtracted before you calculate your owed taxes and a tax credit is calculated after. Since you can’t deduct less than your taxable wages so once you get to the point where your deductions equal your total taxable income, it’s a wash. So if you have $2500 in taxable income and you have more than $2500 in deductions, you just don’t owe any taxes. However, a credit is applied to your tax bill. So if you owe the IRS $2500 and you get $5000 in credits, the IRS is going to send you a check for $2500.

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