A tax credit and a tax deduction are both ways to lower your tax liability, but they work in different ways.
A tax credit is a dollar-for-dollar reduction in the amount of taxes you owe. For example, if you owe $10,000 in taxes and you have a $2,000 tax credit, your tax bill is reduced to $8,000. Tax credits are usually offered for specific purposes, such as energy-efficient home improvements or adoption expenses. Some tax credits, such as the child tax credit or earned income tax credit, are refundable, which means you can receive a refund if the credit is greater than your tax liability.
A tax deduction, on the other hand, reduces the amount of your income that is subject to tax. For example, if you earn $100,000 and you have a $10,000 tax deduction, you only pay taxes on $90,000 of income. Tax deductions are usually available for expenses such as mortgage interest, state and local taxes, and charitable donations.
The main difference between the two is that tax credits provide a more significant reduction in your taxes. However, tax deductions are generally more widely available and can be used to reduce your taxable income, which can result in a lower tax obligation.
It's important to note that there may be limitations or exceptions to tax credits and deductions, depending on the specific purpose or program. For example, some tax credits have income limits or may only be available for a limited time. It's also possible that certain deductions may be phased out for taxpayers above a certain income level.
If you need further guidance on tax credits and deductions, it's recommended that you consult a licensed tax professional or certified public accountant.
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