It’s not uncommon for taxpayers to be confused about the terms tax credit and tax deduction. While both can lower your tax bill, they function differently. In short, a tax credit reduces the amount of tax you owe, while a tax deduction lowers the amount of your taxable income, which lowers the tax you owe. In this blog post, we will be discussing the differences between the two and how they can affect your tax bill.
What Is a Tax Deduction?
A tax deduction is an expense that can be subtracted from your taxable income, reducing your tax bill.
Some common tax deductions include interest paid on mortgages and charitable donations.
Essentially, a tax deduction reduces the amount of income on which you will be taxed. For example, suppose you earned $50,000 in a given year and made a $2,000 charitable donation. In that case, you would only be taxed on $48,000 of income.
What Is a Tax Credit?
A tax credit, on the other hand, is a dollar-for-dollar reduction in your tax bill. While deductions decrease your taxable income, credits are subtracted directly from the tax you owe.
It’s worth noting that some tax credits are refundable, while some are non-refundable. Refundable tax credits, such as the earned income tax credit, can be used to decrease your tax bill below zero. Any excess credit will be refunded to you as a tax refund. Non-refundable tax credits can reduce your tax amount, but they cannot be refunded if they bring your tax bill below zero.
Tax credits often provide more significant savings than tax deductions since they lower your taxable income. However, tax deductions can still have a significant impact on your tax return, especially if you have larger expenses such as a mortgage or charitable donations. Some credits and deductions may have specific income or eligibility requirements, so it’s essential to research and make sure you qualify before claiming them on your tax return.
Wrapping It Up
While both tax deductions and tax credits can ultimately lower your tax bill, they work differently. A tax deduction reduces your taxable income, while a tax credit directly reduces the tax you owe.
Understanding the difference between the two can help you maximize deductions and credits and ultimately save on your taxes. As always, it’s essential to speak with a tax professional to ensure that you’re taking advantage of all tax-saving opportunities available to you.
JT Tax Services: Taxes Made Easy
When it comes to taxes, knowledge is power. That’s why at At JT Tax Services, we give you the peace of mind that comes with knowing that you are working with experienced professionals with in-depth knowledge of all applicable tax laws and regulations.
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