A tax deduction is a way to reduce the amount of income that is subject to a tax. Tax deductions and tax credits both lower the amount of money a person has to pay in taxes. But they do it differently. A tax deduction is subtracted from a the gross income of a taxpayer. For example, if a couple had an income of $60,000 for the year, and they had paid $10,000 in interest on their mortgage, their taxable income would be reduced to $50,000. The value of a tax deduction depends on a person's tax rate, which rises with income. A tax credit, by comparison, has the same value for all taxpayers. In the US there are hundreds of different tax deductions. Some are only available to taxpayers in certain income brackets. Some are available to businesses in particular industries.
References[change | change source]
- Elizabeth Rosen (28 August 2013). "Tax credits vs. tax deductions". US Tax Center. http://www.irs.com/articles/tax-credits-vs-tax-deductions. Retrieved 10 December 2015.
- "Tax Deduction". InvestingAnswers, Inc. http://www.investinganswers.com/financial-dictionary/tax-center/tax-deduction-4148. Retrieved 10 December 2015.
- "Income Tax Issues: What is the difference between tax deductions and tax credits?". Urban Institute, Brookings Institution. http://www.taxpolicycenter.org/briefing-book/background/issues/credits.cfm. Retrieved 10 December 2015.