Question

Distinguish between a tax credit and a tax deduction provide one example of each

Answer 1

Understand Tax Deduction with example :-

A tax deduction is a result of a tax-deductible expense or exemption which reduces your taxable income. A common tax deduction on your federal income tax return is a personal exemption. An example of how this works: If your income was $50,000 your personal exemption would reduce your taxable income by the 2017 personal exemption of $4,050 so your taxable income would now be $45,950.

Understand Tax Credit with an example :-

Unlike tax deductions, tax credits are subtracted from your tax liability (not taxable income). A common tax credit is the child tax credit. If you have a qualifying child, you can take a credit of up to $1,000 per child against your tax liability in 2017. If besides the child tax credit, you would otherwise have a total federal income tax liability of $2,500, child tax credit for one child would reduce that tax liability to $1,500.

Is a Tax Deduction Better Than a Tax Credit? Is a Tax Credit Better Than a Tax Deduction?

If you were ever faced with a hypothetical choice between a $100 tax deduction and a $100 tax credit, you would want the credit. Unlike a tax deduction, a $100 tax credit reduces your tax dollar-for-dollar ($100). On the other hand, a tax deduction reduces your taxable income by $100. The resulting amount of tax you save depends on your marginal tax bracket (in everyday language: your tax bracket). If you are in the 25% tax bracket in 2017, a $100 tax deduction reduces your taxes by $25.