Question

what is the difference between a tax deduction and a tax​ credit? Why is a tax credit more​ valuable?

What is a tax​ deduction?

A. A tax deduction is any amount of money which gets subtracted from a​ person's taxable income.

B. A tax credit is any amount of money which gets subtracted from a​ person's tax bill.

C. A tax credit is any amount of money which gets added from a​ person's tax bill.

D. A tax deduction is any amount of money which gets added from a​ person's taxable income.

What is a tax​ credit?

A.A tax deduction is any amount of money which gets added from a​ person's taxable income.

B.A tax credit is any amount of money which gets added from a​ person's tax bill.

C.A tax deduction is any amount of money which gets subtracted from a​ person's taxable income.

D.A tax credit is any amount of money which gets subtracted from a​ person's tax bill.

Why is a tax credit more valuable than a tax​ deduction?

A.Since a tax credit gets subtracted from a​ person's tax​ bill, it reduces their bill by that amount of​ money, where a tax deduction gets subtracted from their taxable​ income, so their bill is only reduced by a fraction of that amount.​ So, a tax credit saves them money.

B.Since a tax credit gets added to a​ person's tax​ bill, it increases their bill by that amount of​ money, where a tax deduction gets added to their taxable​ income, so their bill is only increased by a fraction of that amount.​ So, a tax credit saves them money.

C.Since a tax deduction gets added to a​ person's tax​ bill, it increases their bill by that amount of​ money, where a tax credit gets added to their taxable​ income, so their bill is only increased by a fraction of that amount.​ So, a tax deduction saves them money.

D.Since a tax deduction gets subtracted from a​ person's tax​ bill, it reduces their bill by that amount of​ money, where a tax credit gets added to their taxable​ income, so their bill is only reduced by a fraction of that amount.​So, a tax deduction saves them money.

Answer 1

1. Tax credit is the amount which gets reduced from the amount of tax payable you owe, whereas tax deduction is the one which gets reduced from the amount of taxable income. Tax credit is more valuable than tax deduction because tax credit reduces the tax liability whereas tax deduction only reduces taxable income, and thus finally tax liability will be less in the 1st case can be easily understood using the following example.

$10,000 tax deduction $10,000 tax credit

Your AGI $100,000 $100,000

Less: tax deduction($10,000)

Taxable income $90,000 $100,000

Tax rate* 25% 25%

Calculated tax $22,500 $25,000

Less: tax credit   ($10,000)

Your tax bill $22,500 $15,000

*Tax rate is only an example rate.

As per the above explanations answers are as follows,

1. A
2. D
3. A