What is the difference between a tax deduction and a tax credit? A tax credit is a dollar for dollar reduction in the amount of tax owed. A tax deduction reduces taxable income so the higher your tax bracket the more value to a tax deduction. For example, if you are in a 15% tax bracket a $1,000 tax deduction reduces your tax by $150. If you are in a 35% bracket the same $1,000 deduction reduces your tax by $350. A $1,000 tax credit is more valuable because it reduces your tax by $1,000.
As you can see tax credits are more valuable, but many tax credits have income limits and phase outs and are therefore only available to low and middle-income taxpayers. People with higher incomes are often not eligible for tax credits.
Some of the more common credits include Education Credits, Child Tax Credit, and the Child and Dependent Care Tax Credit.
The American Opportunity Credit: This credit can help parents and students pay part of the cost of the first four years of college. Eligible taxpayers may qualify for the maximum annual credit of $2,500 per student.
The Lifetime Learning Credit: This credit can help pay for undergraduate, graduate and professional degree courses – including courses to improve job skills – regardless of the number of years in the program. Eligible taxpayers may qualify for up to $2,000.
The Child Tax Credit is an important tax credit that may be worth as much as $2,000 per qualifying child depending upon your income. In order to be a qualifying child, the child must be under 17 and meet other requirements.
The Child and Dependent Care Tax Credit is a credit for a portion of the funds paid to a caregiver so the taxpayer can go to work, actively look for work or go to school.
There are many more tax credits available. Our office can help you plan to make the most of tax credits. To discuss which credits you may qualify for contact us.