Question

What is the difference between tax credits and tax deductions?

Answer 1

Tax credits directly reduce the amount of tax you owe, while tax deductions reduce your taxable income.

Step-by-step explanation:

The main difference between tax credits and tax deductions is how they affect your taxable income and reduce the amount of tax you owe.

Tax credits directly reduce the amount of tax you owe. They are subtracted from your tax liability after your taxable income has been calculated. For example, if you owe $5,000 in taxes and have a $1,000 tax credit, your tax liability will be reduced to $4,000.

Tax deductions reduce your taxable income before your tax liability is calculated. They are subtracted from your adjusted gross income. For example, if you have an adjusted gross income of $50,000 and claim a $2,000 tax deduction, your taxable income will be reduced to $48,000, and your tax liability will be calculated based on that lower amount.

Answer 2

Tax credits reduce the amount of income tax, a person owes to the federal and state governments. It is a type of tax incentive that is subtracted from the total tax he has to pay.

Tax deductions are certain deductions that a person can get in order to lower his tax liability. These deductions are in the form of expenses from the whole year, like insurance premiums or any form of charity etc. These expenses are subtracted from the gross income to get the amount of tax owed.