Difference Between Tax Credit and Tax Deduction
Do you know the difference between a tax credit and a tax deduction? If so, you may not need to continue reading this article. However, if you do not know about the home purchase tax credit and how it is different from a tax deduction you should continue reading.
Tax Credit – A tax credit is a direct dollar for dollar credit against the taxes you owe the IRS after tax deductions have been made against your income. For example, if you owe $4,500 in taxes on your next tax return to the IRS and you qualify for the full $8,000 home purchase first time home buyer tax credit then you would get $3,500 back from the IRS. Pretty sexy right?
Tax Deduction – A tax deduction is a reduction in your adjusted gross income which reduces the amount of taxes you are responsible for paying to the IRS. For example, let us say that you make $60,000 a year for your salary. Now let’s say that you qualify for a $3,000 tax deduction. This means that instead of being taxed on the full $60,000 gross income from your salary you would only be taxed on $57,000 of your salary. What this means for your tax return is that you probably paid taxes throughout the year based on $60,000 so you have a tax balance paid to the IRS based on $60K. But if you only have to pay taxes based on $57,000 you can see that you have now over paid your annual taxes. With this as the case may be, you would then get a tax return of the excess taxes you paid.
Of course these are examples but they do show the difference between tax credits and tax deductions. We recommend you speak directly to a tax preparer if you have further questions about this.
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