What’s the Difference Between a Tax Credit and a Tax Deduction?

When it comes to lowering your tax bill, two tools often come into play: tax credits and tax deductions. They both put money back in your pocket, but they work in different ways. Understanding the difference can help you make smarter financial decisions all year long, whether you’re filing as an individual or running a small business.

Tax Credits: Dollar-for-Dollar Savings

A tax credit directly reduces the amount of tax you owe. Think of it like a coupon for your taxes. If you qualify for $1,000 credit, your tax bill drops by $1,000.

• Individual example: The Child Tax Credit can reduce your taxes by up to $2,000 per qualifying child.
• Business example: The Work Opportunity Tax Credit rewards businesses for hiring eligible employees, directly cutting the amount you owe the IRS.

Tax Deductions: Lowering Your Taxable Income

A tax deduction reduces the portion of your income that is taxed. It will not reduce your bill dollar-for-dollar, but it can still lead to meaningful savings.

• Individual example: Deducting mortgage interest lowers your taxable income, which in turn lowers your overall tax liability.
• Business example: Expenses like office supplies, rent, and vehicle costs can all be deducted from your business income.

Quick Snapshot

• Credit: Directly reduces your tax bill.
• Deduction: Reduces the income you are taxed on.

Why This Matters

Credits and deductions are not either/or. You may be eligible for both. Knowing how they work, and which ones apply to you can help you maximize your savings and plan ahead for tax season with confidence.

At Abacus!, we guide you through the details so you can keep more of what you earn and feel confident every step of the way. Contact us at info@abacuspro.com or (417) 823-7171.