Tax credits versus tax deductions

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What's the difference between a tax deduction and a tax credit?  Each reduces your tax liability, but tax credits will have a bigger impact.  Deductions are subtracted from your income; they are amounts you don't have to pay taxes on, which means that if your marginal tax rate is 15%, your tax savings will be only 15% of the amount of the deduction.  In contrast, credits are subtracted from your tax liability, and therefore you save 100% of the amount of your credit.   For example, a $1000 credit will reduce your taxes by $1000, but a $1000 deduction (in the 15% tax bracket) will reduce your taxes by only $150.

 

 

IMPORTANT NOTE: The information provided to you on this page is limited in scope and should not be your only resource for completing your tax returns. We recommend you seek advice from a licensed tax professional.