Understanding Tax Deductions vs Tax Credits

During a taxation interview, you may be asked to explain the variances between tax deductions and tax credits. Here is a breakdown:

Tax Deductions:

A tax deduction reduces the amount of your taxable income, thereby lowering your overall tax liability. Deductions can be either standard (a fixed amount set by the IRS) or itemized (specific expenses you can deduct).

Tax Credits:

In contrast, tax credits directly reduce the amount of tax you owe, dollar for dollar. They can be more advantageous than deductions as they directly impact your tax bill.

Remember, deductions are subtracted from your income to determine your taxable income, while credits are subtracted from the tax you owe after calculating your total tax liability.

It's essential to understand the distinction between these two concepts to maximize your tax savings and compliance.