Dealing with taxes can be a huge pain. However, you don’t have to worry because the Youtube video “Tax Deductions vs. Tax Credits” can clear up a very common confusion among taxpayers. Let’s find out more!
Tax deductions are going to decrease your taxable income, but tax credits can reduce the amount of actual money you have to pay. It doesn’t sound that different, but at the end of the day, it is, and the best way to understand it is with an example.
Let’s say that your taxable income is $14,000 annually. If your tax rate is 10%, you owe the federal government $1,400. Now, we have to add a $500 deduction. How does that change things? As explained before, a tax deduction reduces your taxable income, so now, the government can only tax you $13,500. At a 10% tax rate, you’ll have to pay $1,350.
Now, consider a $500 tax credit. Your taxable income remains the same at $14,000, so you have to pay $1,400 to the government. But since you have a tax credit, you get to reduce that number directly and now only owe $900.
You can check the rest of the video for more details about tax credits.