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The difference between a Tax Credit and a Tax Deduction
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For those that itemize, a deduction reduces your TAXABLE INCOME. Your tax break is a percent of the cost, not a dollar for dollar reduction. With a few exceptions, you must itemize (rather than take the standard deduction) to benefit.

A tax credit reduces the TAXES YOU OWE dollar for dollar.

There are two kinds of credits: refundable and non-refundable.

  • A refundable credit means you will receive the dollars even if you owe no Federal taxes.
  • A non-refundable credit means you must owe some taxes. Your tax bill is then reduced by the amount of the credit—but not beyond $0.

In most cases a credit is more valuable than a deduction.

<NEXT:  Common Tax Deductions>
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