Main distinction on display here: tax credit vs. tax deduction.
A tax deduction refers to any tax help the government gives that lowers a person's taxable income. You made $60,000 last year. You owe 25% income tax, or $15,000 total. However, you receive a $1,000 tax deduction for your donation to the Puppy Wig Foundation for Balding Dogs. Now you're taxable income is $59,000. The basis the government is using to determine your income tax has shrunk by $1,000. Apply that 25% tax rate...now you owe $14,750.
A tax credit actually lowers your tax bill. This year, the government is offering a $1,000 tax credit for keeping a barrel of toxic waste in your basement. You just happen to have one down there, so you qualify for the program. Your tax base remains $60,000 in this case...the tax credit doesn't impact that. However, your tax liability of $15,000 has been lowered by $1,000. Now you owe $14,000.
The tax credit lowers your tax liability. The tax deduction lowers the income basis used for determining taxes.
Typically, the tax credit would have a bigger impact...a $1,000 tax credit is worth $1,000. The size of the break you get with $1,000 tax deduction will depend on your income and tax rate, but it will have an impact on the bottom line of substantially less than $1,000.
Related or Semi-related Video
Finance: What is the IRS?19 Views
Finance allah shmoop What is the i r s Well
i rest might be the three most hated letters in
the alphabet Well after d m v a pms and
well maybe std The i r s is the internal
revenue service Their internal i e inside the government they're
in charge of collecting revenue A k a They take
money from your pocket in the form of taxes and
they deliver it to uncle sam and they you know
service you and it doesn't feel good So yeah these
are the guys from the us treasury department who checked
to make sure you filled out your income tax forms
correctly and submitted the proper amount And if you screwed
up in any way they will let you know about
it and a half in the form of angry letters
Phone calls knocks on your front door rocks through your
back window Whatever it takes to get you to pay
your fair share of taxes Like why should you get
away with not paying when the jones has paid all
they owed Or the irs can do even worse and
audit you with an audit he irs will request extensive
and very specific information and records from you Paycheck deductions
all kinds of things You claim that you did that
were deductible that may or may not have been forcing
you to spend hours upon hours at your public storage
unit digging through boxes you hoped and prayed you'd never
see again Well after the third solid week of having
your financial history poked and prodded like you've had to
turn your head and cough you uh might actually be
ready and willing to trade in those three letters of 00:01:35.13 --> [endTime] irs for rough one of those stds instead
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