Tax Deductions and Tax Credits Are Not the Same Thing

Trying to make the most of tax deductions tax credits? You are in the right place. Below we break it down in plain English, with practical tips you can actually use.

Key Takeaways

• Plenty of filers treat the two as interchangeable, and the confusion runs in one expensive direction.
• People skip credits they qualify for because they assume taking the standard deduction means there’s nothing left to claim.
• Credits don’t work that way.

Plenty of filers treat the two as interchangeable, and the confusion runs in one expensive direction. People skip credits they qualify for because they assume taking the standard deduction means there’s nothing left to claim.

Credits don’t work that way. They stack on top of whichever deduction you take, standard or itemized, and come off your bill after the deduction math is done. Some go further. A refundable credit like the Earned Income Tax Credit can push your tax below zero, and the IRS sends you the difference as a refund. Deductions can’t do that.

A deduction’s value also floats with your bracket. A dollar deducted is worth 22 cents in the 22% bracket but only 12 cents in the 12% bracket, so the lower your income, the less each deduction does for you. A credit’s face value never changes with your bracket.

Before you file, run through the major credits: the Child Tax Credit if you have kids, the Earned Income Tax Credit if your income qualifies, and education credits like the American Opportunity Credit if anyone in your household pays tuition. Each has its own income limits, but checking eligibility takes minutes in any tax software.

On the deduction side, focus on the ones that work without itemizing. Contributions to a traditional IRA or HSA can lower your taxable income even when you take the standard deduction. For most filers, those two beat chasing receipts to itemize.

The next time a tax break crosses your radar, check whether it’s a deduction or a credit before you get excited. One is worth pennies on the dollar. The other is worth the dollar.

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Categories: Manage Money, Taxes

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Final Thoughts

The bottom line: a little research on tax deductions tax credits goes a long way. Compare your options, watch for seasonal offers, and never pay full price when a better deal is one click away.

Originally published at moneycrashers.com.