Tax Credits Versus Tax Deductions

By Elsie Dudukovich0 Comments


Let’s take a look at what tax education centers have to say about tax deductions and tax credits.

What are tax deductions?
From the Tax Policy Center, “Tax deductions reduce taxable income; their value thus depends on the taxpayer’s marginal tax rate, which rises with income. Because deductions cannot reduce taxable income below zero, their value is limited to the filer’s tax liability before applying the deduction.

What are tax credits?
From the Tax Policy Center, “Tax credits directly reduce a person’s tax liability and hence have the same value for all taxpayers with tax liability at least equal to the credit. In addition, some credits are refundable; they are not limited by the taxpayer’s tax liability.”

InvestorGuide.com informs “Tax credits also typically fall into two categories that are treated very differently, refundable and non-refundable. A refundable tax credit can, after all of your other taxable income and expense information is factored in, generate a cash refund back to you. A non-refundable credit can be used to reduce your overall taxes due, but cannot generate an actual cash refund. Through non-refundable credits the best you could do is get to a zero tax due position.”

Should I look for tax deductions or credits?
The US Tax Center states “So which is better? Neither. It really depends on your situation and what kind of tax savings you can claim. Both tax credits and tax deductions offer various benefits. They are simply different ways to reduce the amount of tax that you owe to the IRS. The main difference is that tax deductions are subtracted from your gross income, while tax credits are subtracted directly from the amount you owe.”