Snackable
TAXES
02 MIN READ

DEDUCTIONS VS CREDITS

UNDERSTANDING THE DIFFERENCE CAN SAVE YOU HUNDREDS OR THOUSANDS ON YOUR TAXES.

KEY TAKEAWAY

DEDUCTIONS REDUCE YOUR TAXABLE INCOME. CREDITS REDUCE YOUR TAX BILL DOLLAR-FOR-DOLLAR.

TAX DEDUCTIONS

deductions lower the amount of income that's subject to tax. they reduce your taxable income, which then reduces your tax bill.

EXAMPLE:

gross income:$50,000
standard deduction:-$13,850
taxable income:$36,150

COMMON DEDUCTIONS:

standard deduction ($13,850 for single filers)
mortgage interest
charitable donations
state and local taxes (up to $10,000)

TAX CREDITS

credits directly reduce your tax bill dollar-for-dollar. they're more valuable than deductions because they provide direct savings.

EXAMPLE:

tax owed before credits:$3,000
child tax credit:-$2,000
final tax owed:$1,000

COMMON CREDITS:

child tax credit (up to $2,000 per child)
earned income tax credit
american opportunity tax credit (education)
retirement savings contributions credit

THE MATH

$1,000 DEDUCTION

if you're in the 22% tax bracket:

saves you $220

$1,000 CREDIT

regardless of tax bracket:

saves you $1,000

QUICK ACTION

review last year's tax return to see which deductions and credits you claimed. consider whether you should itemize deductions or take the standard deduction.