Here are seven common differences between them. Tax deductions and tax credits are ways to lower the taxes you owe to the government, but they work in different ways.

1. Tax deductions are expenses you can subtract from your taxable income. For example, earning $50,000 in a year and having $5,000 in tax deductions, your taxable income will be $45,000. Donations to charities, mortgage interest payments, and state and local taxes are all examples of tax deductions.

2. Tax credits are dollar-for-dollar reductions in the taxes you owe. If you owe $10,000 in taxes and you have a $1,000 tax credit, your taxes owed will be reduced to $9,000. Examples of tax credits include the child tax credit, the earned income tax credit, and the American Opportunity Tax Credit for education expenses.
3. One important thing to note is that tax deductions are only helpful if you itemize your deductions on your tax return. If you take the standard deduction, you won't be able to take advantage of any tax deductions.
4. Tax credits, however, are available to all taxpayers who meet the eligibility requirements. You don't have to itemize your deductions to take advantage of tax credits. For example, if you have a child under 17, you may be eligible for the child tax credit regardless of whether you itemize your deductions.
5. Another key difference between tax deductions and tax credits is what they're used for. Tax deductions are used to reduce your taxable income, reducing the taxes you owe. Tax credits are used to directly reduce the amount of taxes you owe. For example, if you owe $10,000 in taxes and you have a $1,000 tax credit, your taxes owed will be reduced to $9,000.
6. Tax deductions are usually based on expenses you've incurred throughout the year. For example, if you own a home and you pay mortgage interest, you may be able to deduct the interest you paid on your taxes. Tax credits, on the other hand, are often based on specific actions you've taken. For example, if you adopt a child, you may be eligible for the adoption tax credit. If you install energy-efficient windows in your home, you may be eligible for the residential energy tax credit.
7. Tax credits have a maximum value, while tax deductions don't. For example, if you have a $1,000 tax credit, that's the maximum value you can receive. But if you have $5,000 in tax deductions, you can deduct the full $5,000 from your taxable income. Finally, it's worth noting that some tax credits are refundable, which means that if the credit exceeds the taxes you owe, you can receive the excess as a refund.

свернуть