A tax deduction reduces the amount of
income for which you are taxed. For example, if your taxable
income were $50,000, a $2,000 deduction would reduce it to
$48,000. So, you would pay taxes on an income of $48,000 instead
of $50,000. This means your actual savings would be a fraction
of the $2,000 deduction.
A tax credit reduces the total amount of
income tax you owe. So, if you owed $10,000 in federal income
tax, a $2,000 credit would reduce the amount you owed to $8,000.
With a credit, your actual savings would be $2,000. |
