Are tax credits and tax deductions the same thing? In Short answer no, there are two separate provisions whose main functions are to reach a similar goal, and that’s to save you money.
Businesses of all sizes can benefit from having a bookkeeper, especially during tax time. Contact us today to book a discovery call and learn more!
What Are Tax Credits
Tax credits are provisions that reduce a taxpayer’s final bill dollar for dollar. Tax credit can not only lower a tax payer’s final bill but, in some cases, result in that person receiving a tax refund. A tax refund is cash reimbursed to the taxpayer as a result of overpaying their taxes. To put things into perspective, let’s say you have a final bill of $2500 dollars, and you qualify for a tax credit of $1500 your final bill becomes $1000. On that same hand if you were to qualify for a tax credit of $3000 you would receive a $500 dollar tax refund. There are varying ways to receive tax credit, from child dependents and their medical and higher education needs, the expenses used to run a business or work from home, or simply based on the amount of income you bring into a single home. You can find a detailed list of these options on the IRS website.
What Are Tax Deductions
Tax deductions unlike tax credits do not reduce a taxpayer’s final bill dollar for dollar but instead reduce the taxable income of the payer and in turn lowers their tax bill. Tax deductions focus mainly on your income tax bracket.
| Income Tax Brackets for Single Taxpayers, 2022-2023 | ||||
| 2022 Income(2023 Filing Season, due April 17, 2023) | 2023 Income(2024 Filing Season, due April 15, 2024) | Income Difference for Top of Bracket, 2023 vs. 2022 | ||
| Income | Tax | Income | Tax | Difference |
| $0-$10,275 | 10% of income | $0-$11,000 | 10% of income | +$725 (+7.1%) |
| $10,275-$41,775 | $1,027.50 +12% of income over $10,275 | $11,000-$44,725 | $1,100 +12% of income over $11,000 | +$2,950 (+7.1%) |
| $41,775-$89,075 | $4,807.50 +22% of income over $41,775 | $44,725-$95,375 | $5,147 +22% of income over $44,725 | +$6,300 (+7.1%) |
| $89,075-$170,050 | $15,213.50 +24% of income over $89,075 | $95,375-$182,100 | $16,290 +24% of income over $95,375 | +$12,050 (+7.1%) |
| $170,050-$215,950 | $34,647.50 +32% of income over $170,050 | $182,100-$231,250 | $37,104 +32% of income over $182,100 | +$15,300 (+7.1%) |
| $215,950-$539,900 | $49,335.50 +35% of income over $215,950 | $231,250-$578,125 | $52,832 +35% of income over $231,250 | +$38,225 (+7.1%) |
| $539,900+ | $161,218.50 +37% of income over $539,900 | $578,125+ | $174,238.25 +37% of income over $578,125 | N/A |
| Income Tax Brackets for Married Taxpayers Filing Jointly, 2022-2023 | ||||
| 2022 Income(2023 Filing Season, due April 17, 2023) | 2023 Income(2024 Filing Season, due April 15, 2024) | Income Difference for Top of Bracket, 2023 vs. 2022 | ||
| Income | Tax | Income | Tax | Difference |
| $0-$20,550 | 10% of income | $0-$22,000 | 10% of income | +$1,450 (+7.1%) |
| $20,550-$83,550 | $2,055 +12% of income over $20,550 | $22,000-$89,450 | $2,200 +12% of income over $22,000 | +$5,900 (+7.1%) |
| $83,550-$178,150 | $9,615 +22% of income over $83,550 | $89,450-$190,750 | $10,294 +22% of income over $89,450 | +$12,600 (+7.1%) |
| $178,150-$340,100 | $30,427 +24% of income over $178,150 | $190,750-$364,200 | $32,580 +24% of income over $190,750 | +$24,100 (+7.1%) |
| $340,100-$431,900 | $69,295 +32% of income over $340,100 | $364,200-$462,500 | $74,208 +32% of income over $364,200 | +$30,600 (+7.1%) |
| $431,900-$647,850 | $98,671 +35% of income over $431,900 | $462,500-$693,750 | $105,664 +35% of income over $462,500 | +$45,900 (+7.1%) |
| $647,850+ | $174,253.50 +37% of income over $647,850 | $693,750+ | $186,601.50 +37% of income over $693,750 | N/A |
Your income tax bracket will determine the rate of your taxed income, the higher the income the higher the tax rate.To clarify, we will use a single filer and apply the highest possible tax rate which is 37%. A tax reduction of $5,000 dollars will result in $1,850 in savings however that same reduction would only save taxpayers who are within the 32% will only save $1600.
All Taxpayers are allowed the option of a standard deduction, a deduction with a flat rate that will only decrease their taxable income by that amount or itemizing their tax deductions and subtracting the overall expenses that are deductible. These itemized deductions include some of the same factors as tax credit such as educator expenses, certain medical bills, or even owning a home office.
What Did We Learn
Tax credits and tax deductions are two similar but different avenues used to save you money during taxes. Tax Credits reduce the final tax bill dollar for dollar while tax reductions reduce the amount of the payers taxable income. Tax credit can save you more money and even result in a refund, whereas tax deductions will, in the long run, decrease the amount of money you fork out.
Even if this makes it easier for you to understand, if you require assistance with filing your taxes EW Bookkeeping and Consulting will be happy to assist you with filing your taxes or helping you prepare for tax season!
