Tax Education Series #4: What is the difference between Tax Deduction and Tax Credit?
Hello everyone,
What is the difference between tax deductions and tax credits? Sounds similar, doesn't it? I get this question a lot and it's easy to confuse these terms.
Tax deduction is a reduction of taxable income. For example, let's say that you gave donations to the church. The donation is tax-deductible, meaning that you will lower the income that is ultimately taxed (and hence lower your tax bill). A tax credit is even better; that will directly reduce the tax bill. For example, you can get a tax credit of up to $7,500 if you purchased an electric vehicle in Tax Year 2016.
That is a big benefit, especially if you made a lot of money and have a huge tax liability. That $7,500 will reduce your tax bill dollar-for-dollar.
It's that simple! Hope this helps. As always, if you have questions, please feel free to reply to this post and I will answer all your questions. Thanks for reading!
About the Author : I am a cryptocurrency enthusiast and a U.S. Certified Public Accountant with over 15 years of experience in accounting, taxation, and finance.
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