Tax Credits
- Tax Credit vs Tax Deduction
- The General Business Credit
- Form 3800, General Business Credit
- List of Business Credits
More Tax Topics
- Business Structures
- Start-up Costs
- Depreciation
- Car Expenses
- Home Office Deduction
- Travel Expenses
- Hiring Workers
- Meals and Entertainment
- Retirement
- Top Tax Myths
- Per Diem Rates - IRS Publication 1542 Oct 2011 for Travel Within the Continental U.S (for employers who pay a per diem allowance to employees)
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Updated for 2011
Small Business Deductions: Tax Credit vs Tax Deduction
Tax Credit vs Tax Deduction
Tax Credit:
- A tax credit reduces your tax liability dollar-for-dollar.
- For example, if your tax liability is $5,000, a $1,000 tax credit reduces it to $4,000.
Tax Deduction:
- A tax deduction reduces the amount of income subject to income taxes.
- For example, if you have adjusted gross income on Form 1040 of $100,000 and total deductions of $25,000, your taxable income is $75,000.
- If your tax bracket is 20%, the $25,000 in deductions would save you $5,000 in taxes (20% x $25,000).
- In other words, each $100 in deductions is worth $20 in tax savings (20% x $100); each $1,000 in deductions is worth $200 in tax savings (20% x $1,000).
Comparing a Tax Credit to a Tax Deduction
If you're in the 25% tax bracket, each $100 deduction cuts your taxes by $25 (25% x $100). For example, a $400 deduction would reduce your taxes by $100.
However, each $100 tax credit cuts your taxes by $100, dollar-for-dollar. So, $400 in tax credits reduces your taxes by $400.
If you're in the 25% tax bracket, it would take $400 in deductions to reduce your taxes $100.
Therefore, if you're in the 25% tax bracket, a $400 deduction is equivalent to a $100 tax credit (25% x $400=$100).
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