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Key Differences Between Tax Deduction and Tax Credit
When it comes to taxation, understanding the differences between tax deductions and tax credits is crucial. Here are the key differences:
Tax Deduction:
- A tax deduction is an amount that reduces your taxable income.
- It lowers the amount of your income that is subject to taxation.
- Common tax deductions include expenses like mortgage interest, charitable donations, and certain medical expenses.
- Tax deductions can be either itemized or standard, depending on your financial situation.
Tax Credit:
- A tax credit is a dollar-for-dollar reduction in the amount of tax you owe.
- It directly reduces your tax liability, providing a greater benefit than a deduction of the same amount.
- Common tax credits include the Child Tax Credit, Earned Income Tax Credit, and Education Tax Credits.
- Tax credits can be refundable or non-refundable, with refundable credits resulting in a refund if the credit amount exceeds the taxes owed.
Understanding the distinctions between tax deductions and tax credits can help you optimize your tax situation and minimize your tax liability.
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