Exploring Tax Credits vs Tax Deductions
Tax credits and deductions can be used to help lower your tax bill or increase your refund. A tax credit may have a larger impact because it reduces taxes owed rather than reducing the income you'll get taxed on.
|
Feature |
Tax Credits |
Tax Deductions |
|
Definition |
Directly reduce the amount of tax you owe, dollar for dollar. |
Reduce the amount of your income that is subject to tax. |
|
Effect on Taxable Income |
Do not affect the amount of taxable income. |
Lower your taxable income, which indirectly reduces your tax liability. |
|
Value |
Usually more valuable than deductions because they reduce your tax bill by a fixed amount. |
The value depends on your marginal tax rate. The higher your tax rate, the more valuable the deduction. |
|
Types |
Can be refundable or non-refundable. Refundable credits can give you a refund even if you owe no tax. |
Primarily reduce taxable income. Cannot result in a refund on their own. |
|
Examples |
- Earned Income Tax Credit (EITC) |
- Mortgage interest deduction |
|
Eligibility |
Specific qualifications must be met, which can include income limits, expenses of a certain type, or investments in specific areas. |
Generally available to all taxpayers who incur certain types of expenses, though there are often limits and thresholds. |
The information provided here is not intended as tax or legal advice and should not be taken as such; consult a qualified attorney or certified public accountant for professional guidance.