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.
