If you’ve been following our blog for any length of time, you’ve heard lots of talk about tax credits andtax receipt deductions. What’s the difference? Is one really better than the other? Today, we’ll talk about their differences and when one would be more beneficial than the other.

Tax credits reduce the amount of money you owe in taxes dollar for dollar. There are 2 types of tax credits: refundable ones and nonrefundable ones. This one is pretty self-explanatory. Non-refundable credits can reduce your tax liability to zero, but any leftover “credit” expires at that point. Refundable credits on the other hand, can reduce your tax liability to zero, and any remaining “credit” that’s left over can be issued back to you in the form of a tax refund. Some popular tax credits are the Adoption Credit, the Child and Dependent Care Credit, and Lifetime Learning Credit (to learn more about the LLC, check out our blog from a few weeks ago!).

Tax deductions, on the other hand, reduce your taxable income for the year. There are 2 ways to claim a tax deduction, however, you can only choose ONE. First of all, you could claim the standard deduction. This will be a much more popular choice when 2018 taxes are filed since the standard deduction was doubled with the Tax Cuts and Jobs Act or “tax reform”. Secondly, you could choose to “itemize” your deductions. If you choose this method, you would list out individual expenses which could be claimed on your tax return as a tax deduction. Some such expenses include charitable giving, mortgage interest, medical expenses, etc. People usually choose the deduction that will benefit them most financially. In other words, if itemizing your deductions yields a larger deduction than the standard deduction, itemizing would be the best option. However, if the standard deduction were greater than itemizing deductions, choosing the standard deduction would be more beneficial.

As previously mentioned, tax deductions reduce your taxable income for the year. Here’s what I mean. Let’s say you’re in the 10% tax bracket. You qualify for a $1,000 tax deduction (sounds great, right?). You’re actual tax savings would only be $100 ($1,000 tax deduction X 10% tax bracket = $100). That $1,000 tax deduction doesn’t sound as appealing anymore, does it?

So, which is better – credits or deductions? Normally, tax credits are viewed more favorably than deductions due to their ability to actually reduce your tax liability dollar for dollar. However, deductions are also incredibly helpful to reduce your tax liability. Any time tax dollars can be saved, it’s a win!

If you have questions about your personal (or business) tax situation and how tax deductions and credits apply to you, call our office today! Our tax experts can help you to choose the best tax plan for you. Best of all, the consultation is completely free! Give our office a call today to schedule yours!

Lake, Rebecca. “Tax Credit VS Tax Deduction: What’s the Difference?” SmartAsset, SmartAsset, 2 Feb. 2018, www.smartasset.com/taxes/tax-credits-vs-deductions-whats-the-difference.

“Tax Credits VS Tax Deductions.” US Tax Center, 23 Nov. 2015, www.irs.com/articles/tax-credits-vs-tax-deductions.