Welcome Guest. Register Now!  



Reply
 
LinkBack Thread Tools Search this Thread Display Modes
  #1 (permalink)  
Old 03-21-2007, 10:51 AM
Junior Member
 
Join Date: Mar 2007
Posts: 6
What is the difference between a tax credit and a tax deduction?What's more valuable?

I was wondering what is more beneficial a tax deduction or a tax credit?



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
  #2 (permalink)  
Old 03-27-2007, 09:17 AM
TaxGuru's Avatar
Tax Guru
 
Join Date: Jan 2007
Location: New Jersey, USA
Posts: 2,399
Blog Entries: 3
A tax deduction is offset against taxable income. For example, if your W-2 Federal wages are $76,000, and you sustained $3,000 of capital losses, this results in a tax deduction of $3,000 leading to $73,000 of taxable income before standard deduction and personal exemptions. Hence, a tax deduction will reduce the amount of taxable income subject to federal income tax.

A tax credit is an amount that is offset against a taxpayers tax liability. Hence lets assume you have a $3,000 tax credit, than assuming you have a tax liablity of $10,000 from say your taxable income of $50,000, the tax credit would reduce your absolute tax liability by $3,000 resulting in a net tax liability of $7,000.

Clearly what this means is that a $3,000 tax credit is more valuable than $3,000 tax deduction. This is because the tax deduction is really worth $3,000 x effective tax rate of the taxpayer, whereas a $3,000 tax credit is worth exactly that amount, $ 3,000!

__________________
Find a CPA near you!

Ask TaxGuru Please refer to the legal disclaimer.


Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
Ads
Reply


Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

vB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Follow us on Facebook Follow us on Twitter Google Buzz Rss Feeds

» Categories
 
Individual
 » Income
 » IRA/Sep
 » Medical
 
Corporations
 » Payroll
 
Forum for CPAs
 
Financial Planning