Tax Credits vs. Tax Deductions: What’s the Difference?

When tax season rolls around, you might hear the terms “tax credit” and “tax deduction” tossed around like confetti at a New Year’s Eve party. But what do they actually mean? More importantly, how do they impact your tax bill? Let’s break it down — no fancy tax jargon, just plain English.

Tax Deductions: Shrinking Your Taxable Income

Think of a tax deduction like a coupon for your taxable income. It reduces the total amount of income the IRS gets to tax. The smaller your taxable income, the smaller your tax bill.

For example, if you made $50,000 last year and claimed $5,000 in deductions, the IRS only taxes you on $45,000. Common deductions include:

• Mortgage interest: Homeowners, rejoice!
• Student loan interest: Still paying for that degree? You can get a little relief.
• Medical expenses: If they’re high enough, they can help lower your taxable income.

Deductions lower the amount of your income that’s taxed — but they don’t directly reduce the taxes you owe.

Tax Credits: Direct Discounts on Your Tax Bill

A tax credit is even sweeter. Instead of just lowering your taxable income, a credit directly reduces your tax bill dollar-for-dollar. It’s like the IRS giving you a gift card to pay down what you owe.

Let’s say you owe $1,500 in taxes, but you qualify for a $1,000 tax credit. Boom! Now you only owe $500. Some popular credits include:

• Child Tax Credit: Parents, this one’s for you.
• Earned Income Tax Credit (EITC): Designed to help low-to-moderate-income workers.
• Education Credits: For those paying tuition or student loan interest.

Some credits are even refundable, meaning if the credit is bigger than your tax bill, the IRS pays you the difference. Yep, you could end up with a refund check!

So, Which One is Better?

Both deductions and credits can lower your tax bill, but credits tend to have a bigger impact because they reduce your taxes directly. Think of it this way:

• Deduction = Shrinks the income the IRS taxes.
• Credit = Shrinks your actual tax bill.

In a perfect world, you’d get a mix of both to maximize your savings.

Let Lanier Tax Relief Help You Maximize Your Savings

Taxes don’t have to be confusing or stressful — at least, not when you have Lanier Tax Relief, LLC in your corner. We’ll help you find every deduction and credit you qualify for, ensuring you keep more money in your pocket. Give us a call and let’s make tax season less taxing!