May 28, 2020
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Finance

What Is the Difference Between a Tax Deduction and a Tax Credit?

There is a saying that the only two unavoidable things in life are death and taxes. When it comes to the latter, nobody wants to pay more than they must. After all, people don’t like giving their money away to the government; however, by working with professional accountant services Woodbridge VA, individuals will enlist the help of trained professionals who can minimize their gross taxable income, which is the total amount of money on which people have to pay taxes. Two ways that people can reduce their gross taxable income is through tax deductions and tax credits. These two entities are very different and it is important for everyone to understand the difference between the two.

What Is a Tax Deduction?

A tax deduction is a subtraction that people take from their gross taxable income. This is a form of social engineering where the government rewards people for behaving in a certain way. When people reach the “gross taxable income” line on their taxes, they subtract all eligible tax deductions. The most common tax deduction that people take is for the interest on their home mortgage. This is how the government awards people for buying a home.

What Is a Tax Credit?

In contrast, a tax credit is taken directly from what people owe in taxes. Instead of reducing gross taxable income, this subtraction reduces what people have to pay in taxes. Therefore, this adjustment is much better. One example of a common tax credit involves adjustments for investments in green energy, such as solar panels.

Enlist the Help of Professional Accountants

These are only two of the many factors that could impact how much money someone is going to pay in taxes. By working with professional accountants, individuals and businesses can protect their assets and minimize the amount of money they have to pay in taxes.