In your daily career, you probably have to think of every nickel and dime that goes into a project. You care when you’re dealing with a client’s money, but do you pay as much attention when it comes to your own coins? In this article, we will discuss the differences between a tax credit and a tax deduction.
One way to decrease the amount of taxes that are owed on earned income is by the use of tax deductions. If there is a $1000 deduction that is applicable and the tax payer is in a 22% tax bracket, that amount would result in a $220 deduction from one’s taxes ($1000 x .22). Everyday items that may result in a tax deduction are donations to charitable causes and a home mortgage.
If the total amount for itemized deductions is a higher than the amount of the standard deduction, it may benefit the architect to itemize. For itemizing one’s taxes, this choice may mean that the tax filer is eligible for a refund or will pay fewer dollars in taxes.
Tax credits, on the other hand, create a dollar-for-dollar reduction in the amount of taxes owed. Remember that deductions create a percentage reduction in taxes, in contrast. If the same taxpayer is eligible for a $1000 tax credit, this credit creates a $1000 tax savings. Recall that with a $1000 tax credit in the 22% tax bracket we only saved $220.
While it is clear to see that tax credits are superior, tax deductions can also help you keep more of your money. Stay tuned to The Wealthy Architect to learn more about ways to save money in taxes and ways to build your financial house.
