Tax Deduction or Tax Credit…What’s the Difference?

What Is A Tax Deduction?

Tax deductions are those that lower your taxable income. A tax credit works pretty differently, as it literally credits your tax owed. If your taxable income sits at $60,000 for the year and you have a tax deduction for money donated to a 501c3 for $1,000, your taxable income will go down to $59,000. This is beneficial to you because you will owe tax on less money. For instance, if you are in a 20% tax bracket, you will owe 20% on $59,000 instead of the $60,000. Many people throw out phrases like “that’s tax deductible!” I always remember that it doesn’t actually mean you get reimbursed for that or anything. You also have to make sure that you have enough deductions to itemize or it won’t even matter.

 

 

What Is A Tax Credit?

So a tax credit is a thing of beauty and there are two different types. Tax credits are either refundable or non-refundable. So let’s say you have a tax credit of $1,000 and before it is applied, you owe $500 on your federal taxes. If it is a nonrefundable tax credit, when it is applied you will owe zero. However, you will not get the remaining $500 back to you as a credit. If this happens to be a refundable credit (yay!) then you will get a check back for $500 after the $1000 credit is applied. I am happy to have all of my deductions, but a tax credit is really exciting as it directly dollar-for-dollar impacts your return or your tax owed.

 

In Closing…

A tax deduction and a tax credit are both good for you. They are just different and so they applied in different ways. We would love to help you with all of your tax filing needs. We specialize in both personal, small business and multi-location filings. Our team can answer any of your questions and when we are done with your 2018 taxes we can help you make the best decisions as you move through 2019. We look forward to serving you this tax season!