As a legal assistant, I am happy to provide you with information that helps you understand the difference between a tax deduction and a tax credit.
A tax deduction is an amount that the taxpayer is allowed to subtract from their taxable income, thereby reducing their overall tax liability. In other words, a tax deduction reduces the amount of income that is subject to taxation. Some common tax deductions include student loan interest, mortgage interest, and charitable contributions.
On the other hand, a tax credit is an amount that directly reduces the taxpayer's tax liability, dollar for dollar. A tax credit is a much more valuable tax benefit than a tax deduction because it reduces the tax liability itself. Some common tax credits include the child tax credit, earned income tax credit, and education credit.
There are limitations and exceptions to tax deductions and credits. Some deductions and credits have income limitations or phaseouts, meaning that taxpayers with higher incomes may not be eligible for them. Additionally, taxpayers cannot claim both a tax deduction and a tax credit for the same item or expense.
The main takeaway is that tax deductions reduce taxable income, while tax credits directly reduce tax liability. If you need further assistance determining which tax benefits apply to you, I recommend seeking advice from a licensed tax professional.
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