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Tax Credit vs Tax Deduction – How Do They Work?

Tax Credit vs Tax Deduction – How Do They Work?

By on Dec 5, 2016 in Tax Tips | 0 comments

tax-credit-vs-tax-deductionMany people may not understand exactly how the Internal Revenue Service (IRS) actually calculates how and why taxpayers end up getting refunds or owing. A lot of that has to do with a household’s taxable income, the amount of money they receive after taxes. If the IRS ends up taking too much money in taxes for the year, then they are required to issue a refund. If they didn’t take enough, then you owe.

Some Variables to Consider

That’s the simplest way to explain it, but there are many variables to determining this calculation. For one, you have to consider the tax bracket. Depending on how much you money you earn a year, your taxable income will fall into a certain bracket that will determine the percentage of taxes you’ll pay. This tax bracket can fluctuate every year, and it will either alleviate the amount of taxes you have to pay or increase it.

While you can never be sure what the tax bracket will look like from year to year, the tax credit and tax deductions will be able to help you out. Many taxpayers may not fully understand the difference between the two, but the end result is that they both have the potential to adjust your taxable income, helping you possibly fall into a lower tax bracket.

The Tax Credit

A tax credit is the amount of money that can be reduced according to certain stipulations. It ultimately decreases the amount of income tax you owe to the IRS and even state governments. Credits can be referred to more like an award to certain taxpayers. Many of these credits are awarded to people who are doing things that benefit the economy. For instance, anyone who buys an energy-efficient appliance, buys solar panels, or adopts a child qualifies for certain tax credits. While the tax credit is a direct reduction of the amount of taxes owed, the tax deduction is a little different.

The Tax Deduction

A tax deduction pertains to the amount of money that can reduce your reported income, which is related to your expenses. This can be looked at as a minus sign to lower you annual income as well. What this means is if you spent a certain amount of money toward something like a charitable deduction, then you can take that exact amount and deduct it from your taxable income. The IRS usually gives you a standard deduction, but if you end up spending more than the standard, then you can fill out an itemized deduction form.

This is just a brief summary of the differences between a tax credit and a tax deduction. If you wish to get more information on this issue, then call Success Tax Relief to schedule a free consultation by phone or online. Call us today at 877-825-1179.

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