SR Glossary: Tax Deduction vs. Tax Credit

Tax deductions reduce your taxable income.  Your tax is calculated on taxable income.  Therefore, if you are in the 25% tax bracket, for every $1,000 tax deduction you have you save $250 in tax.

Tax credits directly reduce your tax.  If you have a $1,000 tax credit, the whole $1,000 reduces your tax.

Some tax credits are limited to the tax.  If your tax before credits was $800 and you had a $1,000 child care credit, the credit would be limited to $800.  The excess credit is not refundable.  However, certain credits like education, earned income and child tax credits are refundable.

Example of Tax Deduction:  Business expense, mortgage interest, contributions, property tax

Examples of Tax Credits:  Foreign tax credit, child credit, child care credit, education tax credit, earned income credit, energy credit

Tax credits can give you more bang for the buck, but be sure to talk to your ShindelRock representative if you’re not sure which might benefit you given your individual tax situation.