Question: Tax Credits versus Tax Deductions
Many people confuse tax credits with tax deductions. Is one better than the other? A tax credit, such as eligible child care or dependent care expenses, results in a dollarfor-dollar reduction in the amount of taxes owed. A tax deduction, such as an itemized deduction in the form of medical expenses, mortgage interest, or charitable contributions, reduces the taxable income on which your taxes are based. Here is how a $100 tax credit compares with a $100 tax deduction: As you might expect, tax credits are less readily available than tax deductions. To qualify for a $100 child care tax credit, you may have to spend $500 in child care expenses. In some situations, spending on deductible items may be more beneficial than qualifying for a tax credit. A knowledge of tax law and careful financial planning will help you use both tax credits and tax deductions to maximum advantage.
CALCULATIONS: 1. If a person in a 28 percent tax bracket received a $1,000 tax deduction, how much would the person's taxes be reduced?
2. If a person in a 33 percent tax bracket received a $200 tax credit, how much would the person's taxes be reduced?