"What's the difference between a tax credit and a tax deduction?"

A tax credit and a tax deduction are both methods of reducing the amount of taxes that an individual or business owes to the government. However, they function differently and have different effects on the tax bill.

A tax deduction reduces the amount of taxable income on which taxes are owed. For example, if an individual earns $50,000 in income in a year and takes a $5,000 tax deduction, they will only owe taxes on $45,000 of income. Tax deductions can be taken for various expenses, such as charitable donations, mortgage interest, and medical expenses.

A tax credit, on the other hand, directly reduces the amount of taxes owed. For example, if an individual owes $5,000 in taxes and is eligible for a $1,000 tax credit, they will only owe $4,000 in taxes. Tax credits are generally given for specific actions or circumstances, such as installing energy-efficient appliances or adopting a child.

One major difference between the two is that tax deductions are based on the individual's tax bracket, while tax credits are not. For example, if an individual takes a $1,000 tax deduction, their taxable income is reduced by $1,000, but the amount of tax savings depends on their tax bracket. If they are in the 25% tax bracket, for instance, the deduction will save them $250 in taxes. However, a $1,000 tax credit will save them the full $1,000 regardless of their tax bracket.

It's important to note that tax credits generally have more value than tax deductions because they provide a dollar-for-dollar reduction in taxes owed. In addition, some tax credits are refundable, which means that if the credit exceeds the amount of taxes owed, the individual may receive a refund for the difference.

In order to take advantage of tax credits and deductions, it's important to keep detailed records and consult with a tax professional. Also, certain limitations and exceptions may apply depending on the specific circumstances, such as income level, age, and residency status. It's important to review the tax code and seek professional advice if necessary.