Tax Credit or Tax Deduction – Which is Better?

What is the difference between a tax credit and a tax deduction?

Tax Deduction:  amount you are able to “deduct” from your total income in order to decrease your tax liability (the amount you owe).

Tax Credit:   an amount that is subtracted from the amount of actual tax you owe.

For example:  annual income = $30,000 — eligible for a $2,000 tax deduction —leaves $28,000 taxable income taxed at 25% (rates vary)  —  tax due = $7,000.

Using the same numbers but the $2,000 is a tax credit:  $30,000 taxable income taxed at 25% — tax due = $7,500.  Apply the $2000 credit and owe only $5,500.

$1,500 less with a tax credit

So, a tax credit = more valuable than a tax deduction!

For a complete list of tax credits available to you, check out DSIRE – the Database of State Incentives for Renewables and Efficiency.