Personal Finance / Unit 7: Taxes
7.6 Deductions and Credits
Notes
Both lower your tax, but in different ways.
- A deduction lowers your taxable income. Its value depends on your tax rate.
- A credit lowers your tax bill dollar for dollar.
- Example: a $500 deduction for someone in a 20% bracket saves $500 \times 0.20 = 100$, so $100. A $500 credit saves $500.
- A tax-advantaged account, such as a retirement account, can lower taxes now or later.
- Keep records of receipts and forms that support deductions or credits you claim.
Practice
What does a tax credit do?
A credit is subtracted directly from the tax bill.
For someone in a 25% bracket, which saves more tax: a $1,000 credit or a $1,000 deduction?
The credit saves $1,000; the deduction saves $1000 \times 0.25 = 250$. The difference is $750.
A $2,000 deduction is claimed by someone in a 10% bracket. How much tax does it save?
$2000 \times 0.10 = 200$.
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