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learn about tax deductions in 2 minutes

Welcome to Professor Savings.com

We teach finance basics.

Hi, I’m you’re host today Rayfil Wong

Todays topic.

What is the difference between tax deductions and tax credit?

After all, we want to decrease the  amount we have to pay in taxes so more money into our wallet.

Let’s start with tax deduction which is a legal way to reduce taxable income popular deductions

are retirement contributions such as 401 (k) and the interest on mortgage.

Let’s say Jane makes 100,000 and has $10,000 in  deductions she is has a 30%

tax rate let’s do the calculations without deduction she pays $30,000 in taxes with deduction

she is taxed on $90,000 x 30% which is $27,000 $30,000 – $27,000 =  $3,000 in savings

 savings can go toward a cruise.

Let’s move on.

Tax credit is a direct reduction on the taxes.

Some examples are  child tax credit, earned income credit, education, first time home owner, and environmental.

A tax credit is a sum deducted from total amount taxpayer owes.

So let’s say Jane

owes $27,000 a tax credit of $2000 from education tuition reduces tax total to $25,000.

The best thing is to consult a tax professional.

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Professor Savings signing off.

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