Question

      In your own words, explain why a tax credit is more valuable than a tax deduction of the same dollar amount.

Answer 1

Tax deduction are those deduction which are deducted before calculating final income on which taxes are paid. Tax deduction just lowers the taxable income. It reduces the amount of money on which taxes are paid.

Tax credits are those credit which are deducted from tax liability not from the final income. It helps to reduce tax liability dollar for dollar.

This means that suppose we have $500 tax credit and our tax liability is $700 then we are required to pay only $700 - $500 = $200.On the other hand, tax deductions lower our taxable income and they are equal to the percentage of our marginal tax bracket. For instance, if we are in the 25% tax bracket, a $500 deduction saves our tax as $500*25% = $75.

So, from the above example, it is clearly evident that tax credit is more worth than tax deduction.Tax credit simply deduct tax and tax deduction reduce total income.