Your Financial Decisions – Tax Credit vs. Tax Deduction

December 14, 2006

Who likes paying taxes? Did you know that most people pay more in taxes than for all their other expenses combined? Tax credits and tax deductions are tools we can use to reduce this expense.

Credits are better than deductions. Comparing a $1,000 tax credit to a $1,000 tax deduction, assuming a person earns $60,000 a year and is in the 25% tax bracket, the credit will let you keep $750 more than the deduction.

Tax Credit
If you owe $15,000 in taxes a $1,000 credit will reduce the amount you owe to $14,000.

Tax Deduction
A deduction, on the other hand, only reduces the amount of your income that can be taxed. So a $1,000 deduction reduces your taxable income to $59,000 and you still owe $14,750

Bottom Line
Tax Credit – $14,000 owed
Tax Deduction – $14,750 owed

You Decide
Obviously we prefer tax credits to tax deductions. The trick to finding the credits is thinking ahead and going through the tax planning process. I recommend the book Lower Your Taxes Big Time!, 2007-2008 edition, to help navigate the tax laws.

Take Action!
Now you know the difference between tax credits and tax deductions. Make the decision to start your tax planning today!


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Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn't like the other kids... His addiction to personal finance has paid off for his family and now he's helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.

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