suresh Explaining the Difference Between Tax Deduction and Tax Credit
Tax Deduction: A tax deduction is an amount that reduces the taxable income, leading to a lower tax liability. Deductions are typically expenses that are allowed by the government to be deducted from the total income before calculating the tax. Examples of tax deductions include mortgage interest, charitable donations, and certain business expenses.
Tax Credit: In contrast, a tax credit is a direct reduction in the amount of tax owed. Tax credits are usually provided by the government as incentives to promote certain behaviors or activities. Unlike deductions, which reduce the taxable income, tax credits reduce the actual tax bill dollar for dollar. Examples of tax credits include the child tax credit, energy efficiency credits, and education credits.
It's important to note that tax deductions and tax credits both result in lower tax payments, but they work in different ways to achieve this goal. While deductions reduce the amount of income subject to tax, credits directly reduce the tax liability. Understanding the distinction between the two can help taxpayers maximize their tax savings.
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