Both tax credit and tax deduction help taxpayers to save money on taxes. Tax credit helps to lower the tax bill. Credits are subtracted after determining the tax liability. On the other hand, tax deduction lowers the taxable income. It means deductible amount is subtracted from income before determining the tax liability.
Difference Between Tax Credit And Tax Deduction
The main dissimilarities or difference between tax credit and tax deduction can be highlighted as follows:
1. Introduction
Tax Credit: It is a kind of incentive that reduces the tax liability.
Tax Deduction: It is an amount that reduces the taxable income.
2. Reduction In
Tax Credit: It reduces the tax liability
Tax Deduction: It reduces the income
3. Subtracted From
Tax Credit: It is subtracted from total tax bill
Tax Deduction: It is subtracted from adjusted gross income
4. Direct Or Indirect Reduction
Tax Credit: It directly reduces the tax liability
Tax Deduction: It indirectly reduces the tax liability
5. Benefit
Tax Credit: It is more beneficial than tax deduction because because directly lowers the amount of tax.
Tax Deduction: It is less beneficial than tax credit because it does not lower the tax bill directly.
6. Calculation
Suppose, AGI = $ 500000
Tax credit = $ 50000
Tax deduction = $ 50000
Tax rate = 20 %
Tax Credit
|
Tax Deduction
|
|
Annual Gross Income
|
$ 500000
|
$ 500000
|
Tax Deduction
|
($ 50000)
|
|
Tax Liability
|
$500000
|
$ 450000
|
Tax (20 %)
|
$100000
|
$ 90000
|
Tax Credit
|
($ 50000)
|
|
Tax Bill
|
$50000
|
$ 90000
|
Tax Credit Vs Tax Deduction ( Comparison Chart)
Basis
|
Tax Credit
|
Tax Deduction
|
Introduction
|
Tax incentive that minimizes the the bill
|
Amount that lowers the taxable income
|
Reduces
|
Tax liability
|
Income
|
Deducted From
|
Tax Bill
|
Annual gross income
|
Type Of Reduction
|
Direct reduction
|
Indirect reduction
|
Beneficial
|
More
|
Less
|
Distinction Between Tax Credit And Tax Deduction In Short
- Tax credit is deducted from total tax bill of tax payers. But tax deduction is deducted from total taxable income.
- Tax credit reduces the tax liability. On the other hand tax deduction lowers the income.
- Tax credit directly reduces the tax amount. Tax deduction indirectly reduces the amount of tax.
