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What is the difference between a tax credit and a tax deduction?

On Behalf of | Mar 16, 2017 | Income Taxes |

Sometimes it feels like the world changes when daylight savings time comes around. In reality it is just another hour, but as the days get longer and spring arrives, don’t be surprised if you want to spend more time outdoors; especially after work.

Unfortunately, what you gain in time outside you lose in time preparing your taxes. We must remind our readers that the federal income tax filing deadline is less than 30 days away. So between now and then, it is prudent to shore up your calculations to ensure a timely filing and to use all your applicable deductions and tax credits.

But most people still don’t quite understand the difference between a tax credit and a tax deduction. This post will briefly explain. 

Essentially, a tax credit is a dollar for dollar reduction of the taxes you would owe based on your income. So if you qualify for a $1500 tax credit, you would be entitled to a $1500 reduction in your income taxes. Depending on the size of the credit, you could be deemed to have paid too much in taxes withheld from your paycheck; thereby entitling you to a refund.

Conversely, a tax deduction saves you money based on your marginal tax rate. So if the same $1500 tax credit only qualifies as a deduction, and you your tax rate is 28 percent (for example), your savings would only be $420. Indeed, this is considerably less than a tax credit, but every little bit helps when it comes to claiming a refund.

If you have additional tax questions, an experienced attorney can help. 

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