What is the difference between a tax credit and a tax deduction in the context of personal income tax?

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Answered by suresh

What is the difference between a tax credit and a tax deduction in the context of personal income tax?

Understanding the Difference: Tax Credit vs. Tax Deduction

When it comes to managing personal income tax, it's crucial to grasp the distinction between tax credits and tax deductions.

Focus Keyword: Tax Credit vs. Tax Deduction

Tax Credit

A tax credit is a direct reduction in the amount of taxes owed. It is a dollar-for-dollar decrease in your tax liability. For example, if you have a tax credit of $500, your tax bill will be reduced by $500.

Tax Deduction

A tax deduction, on the other hand, reduces the amount of your income that is subject to taxation. It lowers your taxable income, which in turn can lower the amount of tax you owe. Deductions are based on expenses such as mortgage interest, charitable donations, and medical expenses.

It's important to note that tax credits typically provide greater savings than deductions since they directly reduce the amount of tax owed. Deductions, on the other hand, reduce the portion of income that is subject to tax.

Answer for Question: What is the difference between a tax credit and a tax deduction in the context of personal income tax?