Credits and deductions both reduce your tax bill, but they work differently. A credit erases money from the amount you owe. You save the full amount. A deduction reduces your taxable income ONLY IF you itemize deductions. You save a percentage of the deduction depending on your tax bracket. If you don't itemize, it's worthless. Example: Josie is in the 25% tax bracket and itemizes her deductions. She qualifies for a $500 credit for her new insulated windows, and also a $500 deduction for mortgage interest. - Credit: Josie saves the full $500 - Deduction: Josie's taxable income is reduced by $500. If she had to pay tax on that $500 she would pay 25% of $500 = $125, so she saves $125. How much more does the credit save Josie than the deduction?
Credits and deductions both reduce your tax bill, but they work differently.
A credit erases money from the amount you owe. You save the full amount.
A deduction reduces your taxable income ONLY IF you itemize deductions. You save a percentage of the deduction depending on your tax bracket. If you don't itemize, it's worthless.
Example: Josie is in the 25% tax bracket and itemizes her deductions. She qualifies for a $500 credit for her new insulated windows, and also a $500 deduction for mortgage interest.
- Credit: Josie saves the full $500
- Deduction: Josie's taxable income is reduced by $500. If she had to pay tax on that $500 she would pay 25% of $500 = $125, so she saves $125. How much more does the credit save Josie than the deduction?
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