"Tax Credit vs. Deduction: Key Differences Explained"

The article outlines the key differences between tax credits and tax deductions, emphasizing that tax credits directly reduce tax liabilities, offering greater financial benefits, while tax deductions lower taxable income, providing smaller indirect savings. Examples and common types of both are also provided for clarity.

Feature Tax Credit Tax Deduction
Description A tax credit is a dollar-for-dollar reduction in the actual tax owed. A tax deduction reduces the amount of income subject to taxes.
Calculation Method Directly subtracted from the tax liability. Subtracted from taxable income before tax is calculated.
Impact Provides a greater benefit because it lowers the tax bill directly. Provides a smaller benefit as it only lowers the taxable income.
Example If you owe $1,000 in taxes and have a $200 tax credit, your tax bill is reduced to $800. If your taxable income is $50,000 and you have a $2,000 deduction, your taxable income becomes $48,000.
Types Common examples include child tax credit, education tax credit, and energy tax credit. Common examples include deductions for mortgage interest, charitable contributions, and medical expenses.


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