Tax Deductions vs. Tax Credits
Tax deductions and tax credits may be the best part of preparing your tax return. Both reduce your tax bill, but in very different ways. Knowing the difference can create some very effective tax strategies that
reduce your tax bill.
- Tax deductions are specific expenses you’ve incurred that you can subtract from your taxable income. They reduce how much of your income is subject to taxes.
- Tax credits are even better — they give you a dollar-for-dollar reduction in your tax bill. A tax credit valued at $1,000, for instance, lowers your tax bill by $1,000.
Click the orange button below to choose what you would rather have.
It is important to understand the difference between deductions and credits. While both credits and deductions help taxpayers reduce the amount of tax they must pay, they do so in different ways.
Deductions, such as the standard deduction, lowers the tax by reducing the amount of income that would otherwise be taxable. Lower taxable income results in a lower tax liability.
Credits, unlike deductions, do not come into play until after taxable income has been computed and the tax determined. Then credits may be used to reduce the tax liability dollar for dollar.
Popular Tax Deductions and Tax Credits
There are hundreds of possible deductions and credits out there, and they all have their own rules about who’s allowed to take them. Here are some big ones:
Tax Break – Credits
- American Opportunity Credit
- Lifetime Learning Credit
- Adoption Credit
- Child and Dependent Care Credit
- Child Tax Credit
- Earned Income Tax Credit
- Additional Child Tax Credit
- Credit for the Elderly or the Disabled
- Residential Energy Tax Credits
- Saver’s Credit
Tax Break – Deductions
- Capital Loss Deduction
- Charitable Contributions Deduction
- Home Office Expenses Deduction
- Medical Expenses Deduction
- Mortgage Interest Deduction
- Property TRaxes Deduction
- Health Savings Accoung Deduction
- IRA Contributions Deduction
- 401(k) Contributions Deduction
- Gambling Loss Deduction
Non-Refundable Versus Refundable Credits
Some credits are non-refundable, and some are refundable. Non-refundable means that the combined amount of these credits cannot reduce the taxpayer’s tax liability below zero.
Refundable credits may reduce the taxpayer tax liability below zero, and the difference is refunded to the taxpayer.
