vs. Tax Credits” will help you understand an extremely common confusion for taxpayers. Learn more.
Even though tax deductions lessen your tax bill through reducing it, tax credits could reduce the amount you must pay. Although it doesn’t sound much different however, at the end of the day, it’s one of the easiest ways to grasp it is to use an illustration.
Let’s assume that your taxable earnings are $14,000 per year. Your federal tax rate at 10% means you owe $1,400 to the federal government. Now, we have to make a deduction of $500. How does that change things? The tax deduction lowers your tax-deductible income. So, the government has the ability to charge you only $13,500. With a tax of 10% rate, you’ll have to contribute $1,350.
Consider a 500 tax credit. The tax credit still leaves you with $14,000 in the tax deductible amount, and you’ll only have to pay $1,400. It is possible to reduce your tax-deductible income through a tax credit. Then you’ll owe $900
It is possible to watch the rest of the video for further information on tax credits.