Tax Credits, Deductions and Incentives

 There is a distinct difference between a tax deduction and a tax credit.

 A tax deduction is a reduction from income before the total tax liability is computed.

 A tax credit is an actual reduction of the total tax bill.

 For example (assume your taxable income is $30,000 and your tax bracket is 28%).

If you receive a $2,000 tax deduction, your taxable income will be $28,000.  Your taxes will be $7,840 ($28,000 x 0.28) instead of $8,400 ($28,000 x 0.28) for a tax reduction of approximately $560.

If you receive a $2,000 tax credit, you can deduct it from your taxes due of $8,400 which will lower your tax bill to $6,400.

In the above example, a tax credit lowers your tax bill to $6,400, but a tax deduction lowers your tax bill to only $7,840.  As you can clearly see, a tax credit is worth more than a tax deduction. 

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