The Difference between a Tax Credit and a Tax Deduction

We are totally sure that you have already heard about these sentences before, however, most of the taxpayers do not even realize the importance of these two concepts. This is because they play a crucial role in the process of saving money on your taxes. Even though the main idea of both deduction and tax credit is the same, there are several differences between them. Let’s dive into this topic in order to consider all the pros and cross of both concepts, and understand which one is more suitable for you.

Tax Deduction

Tax deduction is the final result of tax-deductible expenses, such as charities, which can dramatically reduce your taxable income. For example, if your income is $50.000, the standard deduction can reduce your taxable income of $12.200, by cutting your taxable income from $5.000 to $37.800. Sounds great, doesn’t it?

Tax Credit

Compared to tax deductions, tax credits are deducted from the taxes that you owe. One of the most common credits is a “Child Credit.” So, if you have children, you can easily receive a credit in the sum of $2.000 for each child, against the taxes that you owe to the IRS. But, if you have a total federal income tax liability of $35.00, then your child credit will reduce to $1.500.

Which One is Better?

Of course, if you have to choose between $100 deduction, or $100 credit, then it is logical, that you will prefer receiving a credit, since $100 credit reduces your tax dollar for dollar. At the same time, tax deduction will reduce your taxable income. In most of the cases, the amount of the reduced sum depends on your unique tax bracket and your status.

Sometimes it is too hard for a common taxpayer to figure out which tax credit or tax deduction is more suitable for them. Prestige Auditors tax experts will help you in this process. By asking a few questions about you, we can offer all the types of tax deductions and tax credits which are preferable for your unique case. Additionally, we will help you choose the best option that you are eligible for.

If you still have any questions concerning this topic, do not hesitate to contact Prestige Auditors. And we will find the best solution to all your tax issues, and provide you with a full guideline of how to take the advantage from both tax deduction and tax credits, in order to minimize your tax spending.