As you probably know, tax credits<\/a> and tax deductions<\/a> can help reduce your overall income tax liability. Every year, millions of taxpayers search for credits and deductions that can help them save money. While you should take advantage of all the tax breaks you\u2019re eligible for, don\u2019t overlook the fact that tax credits and tax deductions are not the same thing. There is one major difference between a tax credit vs deduction.<\/p>\n Tax credits<\/strong> provide a dollar-for dollar reduction of your income tax liability. This means that a $1,000 tax credit saves you $1,000 in taxes.<\/p>\n Tax deductions<\/strong> lower your taxable income<\/a> and they are equal to the percentage of your marginal tax bracket. For instance, if you are in the 10% tax bracket, a $1,000 deduction saves you $100 in tax (0.10 x $1,000 = $100).<\/p>\n RELATED<\/strong>: Updated 2024 Tax Brackets<\/a><\/p>\n A tax credit is always worth more than a dollar-equivalent tax deduction, because deductions are calculated using percentages. Referring to the numbers above, you can see that a $1,000 credit offers $900 more in savings than a $1,000 deduction.<\/p>\n Let take a closer look at both tax credits and tax deductions.<\/p>\n Tax credits<\/a> can help reduce your liability dollar-for-dollar. However, they cannot reduce your income tax liability to less than zero. In other words, your gross income tax liability is the amount you are responsible for paying before any credits are applied.<\/p>\n The majority of tax credits are non-refundable<\/a>, which means they will be subtracted from your tax balance, but they cannot reduce your income tax liability to less than zero. With non-refundable tax credits, any excess amount expires in the year in which it was used, meaning that the additional amount is not refunded to you. However, there are some refundable tax credits, and these can be used to increase your tax refund<\/a>.<\/p>\n To get a better idea of how tax credits work and whether or not you qualify, you need to know what is available to taxpayers in your situation \u2014 such as your filing status<\/a>, age, employment, and other factors. It is important to remember that just because you qualify for one type of tax credit does not mean that you qualify for the rest.<\/p>\n How much are tax credits worth? That depends on the particular tax credit you\u2019re talking about. And just as the amount of each tax credit is different, so are the qualification guidelines. Since a tax credit helps reduce the amount of money that you pay in income tax<\/a>, it is essential that you are 100% accurate with this information. If you are unsure of whether or not you qualify for a tax credit, it\u2019s recommended that you check with a tax professional<\/a> before claiming the credit on your income tax return<\/a>.<\/p>\n While tax credits are less common than tax deductions, they are available for things such as adopting a child, buying a first home, childcare expenses, home office expenses, and caring for an elderly parent. Additionally, there are various business tax credits that you may be able to consider if you are a business owner.<\/p>\nTax Credits<\/h2>\n
WATCH: Tax Credits vs Tax Deductions \u201cWrite Offs\u201d<\/h3>\n