video “Tax Deductions vs. tax credits” helps to clarify a very common confusion among taxpayers. We’ll find out more.
Tax deductions can decrease your taxable income through reducing it, taxes credits can reduce the amount that you pay. Although it may not sound very different, the truth is that it is. One of the best ways to understand it is using an instance.
Imagine that your taxable income is $14,000 annually. Your tax rate at federal level of 10% would mean that you owe $1400 to the federal government. You must subtract $500. What does this mean? The way to think about it is that the deduction for tax reduces the tax rate on your income. So today, the government is able to just tax you at a rate of $13,500. The tax rate is $1350 with a 10% tax rate.
Think about a tax credit of 500. You still have $14,000 in taxable income, but the tax you have to pay is $1,400. Since you’re eligible for credits for tax that allows you to lower this amount in a direct manner and only owe just $900.
You can check the rest of the clip for additional details on tax credits.