Tax Deduction Vs. Tax Credit

by Shanika Chapman

How much income tax you have to pay is determined by your income. To pay the least amount of taxes, you want to take applicable tax deductions to reduce your taxable income and tax credits to reduce your tax bill.

Tax Credits

Tax credits are typically given for educational purposes, low income or having dependents. The amount of the credit is deducted from your tax liability and produces a significantly higher bottom-line reduction than a deduction.

Tax Deductions

Tax deductions reduce your taxable income, which is the amount the government uses to determine how much tax you should pay. Some deductions can be taken only if you itemize.

Refundable VS Non-refundable Credits

Refundable credits are credits that can be taken in full, even if they exceed the amount that you owe the government. The Earned Income Credit is one example. Non-refundable credits are credits that cannot reduce your tax liability beyond zero. If a non-refundable credit is more than what you owe in taxes, you can only take up to the amount owed.

Common Deductions

Some common deductions you can take without having to itemize are deductions for retirement contributions, student loan interest, capitol losses and business expenses.

Common Tax Credits

The Child Tax Credit, Adoption Credit, Child and Dependent Care Credit, First-Time Homebuyer Credit and The Hope or Lifetime Learning credit are common tax credits.

References

About the Author

Shanika Chapman has been writing business-related articles since 2009. She holds a Bachelor of Science in social science from the University of Maryland University College. Chapman also served for four years in the Air Force and has run a successful business since 2008.

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