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Tax Deduction vs Tax Credit

Tax Deduction vs Tax Credit

March 18, 2024

Tax Deduction vs Tax Credit

Tax season is upon us so let’s break down the differences as they are often misunderstood.

Tax deductions:

Think of these as expenses you subtract from your income, helping to reduce your taxable income.

Some common examples include:

  • Mortgage interest
  • Student loan interest
  • Charitable contributions
  • Traditional 401k and maybe IRA contributions

Let’s look at an example:

If your income is $50,000 and you have $10,000 in deductions, you’ll be taxed on $40,000 instead.

  • Say you are in the 22% tax bracket, the deduction saves you $2,200 in taxes

Tax credits:

Directly reduce your tax bill, dollar for dollar. Therefore, are more favorable than tax deductions.

  • The tax credit is categorized as either nonrefundable, refundable, or partially refundable.

A couple common examples are:

  • Child tax credit
  • Electric vehicle tax credit

Let’s look at an example:

If you owe $1,000 in taxes and have a $500 tax credit, your tax bill is reduced to $500.

Be sure to consult a tax advisor and financial advisor to learn more about optimizing your own tax strategy to keep more of your hard-earned money.

Disclosure:

Retirement Planning Solutions, LLC is an SEC registered investment adviser. SEC registration does not constitute an endorsement of Retirement Planning Solutions, LLC by the SEC nor does it indicate that Retirement Planning Solutions, LLC has attained a particular level of skill or ability. This material prepared by Retirement Planning Solutions, LLC is for informational purposes only and is accurate as of the date it was prepared. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Advisory services are only offered to clients or prospective clients where Retirement Planning Solutions, LLC and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Retirement Planning Solutions, LLC unless a client service agreement is in place. This material is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Retirement Planning Solutions, LLC is not an accounting firm. Please consult with your tax professional regarding your specific tax situation when determining if any of the mentioned strategies are right for you.