Question

Drew and Karen are in the 24% tax bracket. They have a $4,000 health savings account deduction. They also have a child care credit of $800. How much will the deduction and the credit, respectively, reduce their taxes?

Answer 1

Deduction: A deduction simply reduces the amount of Income that you must pay tax on.

Tax credit: A Tax credit helps reduce your Tax liability dollor to dollor. This means that the Tax credit deducts the tax laibility.

Deduction will be deducted from the income before calculating the tax liability and on the other hand, Tax credit will be deducted from tax liability. T

Taxable income	xxxxxxxxxxxx
Less: Deductions	$4,000
Net taxable Income	xxxxxx
Total tax payable	xxxx
Less: Tax credits	$800
Net tax payable	x

	Health Savings account deduction	Child care tax credit
Amount	$4,000	$800
Tax savings	($4,000 x 24) = $960	$800