Tax Deductions vs. Tax Credits

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Tax Credits

  • Direct reduction of the tax due
  • Some can be refundable and some can not
  • Major tax credits include
    • Earned income credit (EIC)
    • “Make Work Pay” credit
    • Lifetime learning credit
    • Saver’s tax credit
    • Green energy tax credit

Tax Deductions

  • A deduction from your income that comes from various expenses incurred by a taxpayer
  • Lower your taxable income
    • Taxable income - (minus) total deductions = (equals) total tax bill for year
  • Calculated using marginal tax bracket
  • Can be used to entice taxpayers to participate in programs that have societal benefits

There are two different types of tax deductions: standard and itemized. Each type of deduction has different benefits and qualifiers. Take a look at the table below to compare some of the major differences between standard and itemized deductions. 

Standard

Itemized

Can be claimed on IRS Tax Form 1040, 1040A or 1040EZ

Can be claimed on IRS Tax Form 1040 only

Dollar amount that reduces your taxable income

May offer more benefits than standard deductions

Based on your filing status

Can be used if you don’t qualify for standard deductions

Subtracted from your Adjusted Gross Income (AGI) 

If your AGI exceeds a certain level, a portion of itemized deductions is not permitted

Some deductions have a minimum