What’s the Difference Between a Tax Deduction and Tax Credit?
What’s the Difference Between a Tax Deduction and Tax Credit?

What’s the Difference Between a Tax Deduction and Tax Credit?

You don’t have to be a business owner or be self-employed to qualify for tax deductions and tax credits. When you take a look at the tax deductions list, there are numerous things you can deduct from your taxes depending on your situation. While both tax credits and deductions can help positively boost your tax refund, you may wonder what the difference is between them. We’ve got you covered to help you understand this aspect and which one is better for you.

Tax Deduction vs. Tax Credit

The standard deduction for 2019 is $12,200 for individual taxpayers. So if you earned a salary of $60,000 in 2019, then your taxable income would be $47,800. Most people qualify for this standard deduction, but other tax-deductible expenses can lower your taxable income as well. These could be in the form of medical expenses, home mortgage interest, charitable contributions and more.

A tax credit is a dollar-for-dollar reduction of the amount of taxes you owe. Take the Child Tax Credit as an example. For the 2019 tax year, you qualify for a tax credit of $2,000 per child. So if your federal income tax liability is $5,000 that you would need to pay, but you have two children, the $4,000 tax credit means you only have to pay $1,000.

Which One Is Better?

You should never turn down a tax deduction or a credit if you qualify for one since it’s putting money back in your pocket directly. The main difference to understand is a tax deduction reduces your taxable income by a percentage of the expense, while a tax credit reduces the overall tax liability and usually provides the most tax relief. The amount saved with a tax deduction depends on which tax bracket you are in. So if you fall in the 24% tax bracket, then every tax-deductible expense will reduce the taxes by 24% of the amount you paid on that item.

Know The Difference Between Standard And Itemized Deductions

A common question taxpayers have is whether they should take the standard deduction or itemize their deductions. Most of the time the standard deduction provides the best tax relief, but it all depends on the amount of your itemized deductions. The standard deduction for individuals is $12,200 in 2019, so unless your itemized deductions exceed this amount, then it makes the most sense to just use the standard deduction. It’s still worth the time to look at the tax deductions list to ensure you’re maximizing your tax-deductible expenses though.

Rocket Tax offers credit counseling and other services needed by taxpayers. Understanding the difference between a tax credit and a tax deduction can help you have a better picture of your overall tax situation. Once you know what you qualify for, or even if you’re unsure, feel free to let us know and we can provide some clarity. Never hesitate to contact us for any of your tax preparation needs.