How many of you know the difference between a tax deduction, and a tax credit? When I was younger, I didn't even know the term, much less the difference. My mom took the taxes down to the nearest large tax return preparing company, and had them do the work for us. With that said, let me explain the difference between the tax deduction, and the tax credit.
A tax deduction reduces your taxable income in most cases. For example, if you are in the 25% tax bracket, and have a $1,000 tax deduction, you would pay $250 less in taxes (in most cases).
A tax credit reduces your taxes owed dollar for dollar. For example, if you are in the 25% tax bracket, and have a $1,000 tax credit, you would pay $1,000 less in taxes (in most cases).
I hope this helps you a little in understanding a part of the tax process. Obviously, tax credits are better than tax deductions, but a deduction is better than nothing as well. I encourage you to get your return completed early this year, and if you are getting a return, put it to work!
