What’s the Difference?

“A tax credit lowers your tax bill dollar for dollar. A deduction shaves money off your taxable income, so the value depends on your tax bracket. If you’re in the 25% bracket, a $1,000 deduction lowers your tax bill by $250. But a $1,000 credit lowers the bill by the full $1,000, no matter in which bracket you are.” (Kimberly Lankford, Kiplinger’s Personal Finance).

In order to decide whether to take advantage of the credit or deduction you need to take a look at first of all if you are eligible for it based off of your income or tax bracket. It’s important for you to know the requirements of the credit or deduction as well as your your own financial circumstance. If you’re not sure, consult a professional because that is when things can get shady.

A tax deduction is used to pay down the amount of taxes you owe at the end of the year and is typically taken from your paycheck. Tax deductions can also be charitable donations, child care, retirement contributions, education tuition, or medical expenses. These deductions lower the amount of taxes you end up paying.

Here are some business related tax deductions:

• startup expenses
• office expenses
• business meals & entertainment
• business travel

A tax credit is subtracted from to amount of taxes owed at the end of the year. Tax credits reduce the amount you owe for exactly what the tax credit is worth. For example, if you have a $1000 tax credit, you save yourself from paying that $1000 of tax. Tax credits can be more valuable since you know whatever dollar amount you are getting, that amount will be subtracted. However, there may be more limitations as to whether you apply for the tax credit or not.

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