Both tax credits and deductions can cut your liability, potentially saving you hundreds or even thousands of dollars if you itemize your returns. While many people might use the terms “credit” and “deduction” interchangeably, there are actually some important differences that make one far better than the other, according to experienced tax advisors. Keep reading for a breakdown of how these two tax relief mechanisms operate, and why credits are much more effective.

Tax Deductions

A tax deduction works by lowering the amount of income subject to taxation, indirectly lowering your bill. One by one, these provisions may not result in significant savings, but those who claim several can dramatically reduce their taxes, especially if they’re high earners in a higher bracket.

For instance, if a taxpayer in the 12% tax bracket writes off $1,000 in mortgage interest, they won’t have to pay taxes on that money, saving $120 on their tax bill. However, an individual in the 35% bracket taking the same deduction would save $350, since their income is taxed at a higher rate.

Tax Credits

Unlike deductions, tax credits provide more direct savings and are generally preferred by tax advisors and their clients alike. Essentially, a tax credit is like a discount, directly cutting the amount you owe. For example, if you owe $1,500 on your income taxes and receive a $500 credit, your final bill will only be $1,000.

Because they don’t take your tax bracket into account, credits are more beneficial for lower-income taxpayers, especially since many are refundable. With a refundable credit, you’ll actually get a refund from the IRS if the credit you’re eligible for is more than your tax liability.

Taxes can be confusing and stressful, which is why taxpayers throughout the North Carolina triad have turned to Sharrard, McGee and Co., PA for over 40 years. With their in-depth knowledge of the code, their team will ensure that you get every credit and deduction you deserve, saving you time, money, and uncertainty. Visit their website for a closer look at their tax consulting and preparation services, and follow their Facebook page for more updates and tips. If you’d like to schedule an appointment at their Greensboro location, call (336) 884-0410, or (336) 884-0410 for a free consultation in High Point.