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We teach finance basics.
Hi, I’m you’re host today Rayfil Wong
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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