Taxes

Understanding Tax Credits

A tax credit is an amount you subject off the total tax owed. Many people often confuse “credit” and “deduction”. A tax credit is typically much better than a tax deduction.

A tax deduction only reduces your taxable income. An actual tax credit will reduce the amount you owe in taxes.

Here is an example:

    John Smith has an adjustable gross income of $25,000. The tax owed on $25,000 is $835 + 15% of the amount over $8,350 according to the federal tax bracket. The tax owed would be $3,332.50. ($835 + (($25,000 – $8,350) * .15))

    Tax Deductiom

    A tax deduction of $1,000 would result in the new tax amount of $3,182.50. ($835 + (($25,000 – $8,350 - $1,000) * .15))

    Tax Credit

    A tax deduction of $1,000 would result in the new tax amount of $2,332.500. ($835 + (($25,000 – $8,350) * .15)) - $1,000

As you can see, a tax credit will give you a dollar for dollar reduction in the amount of taxes owed and can save you much more money such as seen in the example above.

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