Tax Credits vs Tax Deductions Obj 1 What is the difference b

Tax Credits vs. Tax Deductions. (Obj. 1) What is the difference between a tax credit and a ta deduction? If a taxpayer with a marginal tax rate of 15% has a $ 1,000 deduction, how much tax will she save? How much tax will she save with a $1,000 tax credit? 5.

Solution

Tax deduction: Deduction reduces the taxable income and their value thus depends on the taxpayer\'s marginal rate,which rises with income. In simple terms a deduction saves off your taxable income, so the value depends on tax bracket. So if a tax payer with a marginal tax rate of 15% has a $1000 deduction,she will save the tax amount of $150 ($1000*15%).

Tax Credit: Credit reduces the tax liability directly and do not depend on tax rates. So if a taxpayer has $1000 tax credit, then she will save the tax amount of $1000