Tax Facts: Credits vs. Deductions

For most individuals, personal income tax planning can be a very “taxing” chore. Just keeping all the jargon straight is, quite often, half the battle. For instance, take tax credits and tax deductions. They sound similar, but do you know how they are different?

First, consider the following: A $1,000 credit is more valuable than a $1,000 deduction on your income tax return. A tax credit reduces your tax dollar for dollar—that is, a $1,000 tax credit actually saves you $1,000 in taxes.

By comparison, a tax deduction reduces your taxable income, but is only worth the percentage equal to your marginal tax bracket. For instance, if your tax bracket is 27 percent, a $1,000 deduction saves you $270 in tax (.27 x $1,000), which is $730 less than the savings with a $1,000 tax credit.

The higher your tax bracket, the more a deduction is worth, but a credit is always worth more than a dollar equivalent deduction!

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