• Wed. Nov 25th, 2020

Tax Deductions And Tax Credits What’s The Difference

Tax Deductions And Tax Credits What’s The Difference, you want to save as much money as you can so lets start. First lets learn what difference between a tax credit and tax deduction?

  • Tax credits directly reduces the amount of taxes you owe. If say you earned $1000 you would deduct $1000 from your earnings.
  • Tax deductions, on the other hand, reduces how much of your income is subject to taxes. Deductions lower your taxable income by the percentage of your highest federal income tax bracket. So if you fall into the 22% tax bracket, a $1,000 deduction saves you $220.
  • At times the deduction maybe above line 37 on your tax return. This means that for certain things such as Medicaid it is as if you never earned the money.
A $10,000 tax deduction gets you$10,000 tax credit gets you
Your AGI$100,000$100,000
Tax deduction($10,000)
Taxable income$90,000$100,000
Tax rate (example)25%25%
Calculated tax$22,500$25,000
Less: tax credit($10,000)
Your tax bill$22,500$15,000

The Catch To Tax Credits

  • Keep in mind that tax credits can be in 2 forms. Either refundable which means even if you didn’t pay that much money taxes you can get the extra money back. An example Qualifying For Earned Income Credit When You Haven’t Earned. Other tax credits get you a refund that is limited to what you paid in.

Tax Credits Getting The Biggest Deduction

The Standard Deduction
  • The standard deduction is a one-size-fits-all reduction in the amount of your income that’s subject to tax. Requires nothing from you.
  • You claim the standard deduction on Form 1040. The amount varies depending on your filing status.

Itemizing For The Greatest Tax Credit Deductions

  • home mortgage interest
  • medical expenses
  • charitable donations
  • business expenses

Obviously you will want to figure out which one gets you the highest returns and file that way.

Other great articles for you to read Stock Correlation What Does It Mean, Passion And Investors.

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Binyomin Terebelo

Of course keep in mind that this solely written to help educate you under no circumstance may we be held responsible for what you do based on correct or incorrect information you glean.

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