What is the difference between a tax credit and a tax deduction?<\/p>\n
They are NOT the same thing.<\/p>\n
One of them is usually much more valuable than the other.<\/p>\n
A tax credit directly reduces the Federal tax amount that you owe, dollar-for-dollar.<\/p>\n
A tax deduction reduces your Federal taxable income.<\/p>\n
Still not totally clear what this means?<\/p>\n
Here’s a great example:<\/p>\n
Let’s say you or one of your dependents was in college.<\/p>\n
Prior to 2021, there were two different options you may have had:<\/p>\n
1) Claiming the American Opportunity CREDIT of $2,500.<\/p>\n
2) Claiming the Tuition and Fees DEDUCTION of $4,000<\/p>\n
To the naked eye, option 2) seems more valuable – $4,000 is greater than $2,500.<\/p>\n
But while the credit will directly reduce the tax that you owe by $2,500, the deduction will only reduce your taxable income by $4,000.<\/p>\n
If you’re in the 22% income tax bracket, that amounts to a tax savings of $880 (i.e. $4,000 X 22%).<\/p>\n
This is a great example of why tax credits are generally more valuable than tax deductions.<\/p>\n","protected":false},"excerpt":{"rendered":"
What is the difference between a tax credit and a tax deduction? They are NOT the same thing. One of them is usually much more valuable than the other. A tax credit directly reduces the Federal tax amount that you owe, dollar-for-dollar. A tax deduction reduces your Federal taxable income. Still not totally clear what […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"yoast_head":"\n