Summer School: Credits & deductions
We're taking you back to the basics with our summer refresher course on finance terms. Today, the difference between a tax credit and a tax deduction and what it means for you come tax time.
Financial summer school (iStockPhoto)
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Tess Vigeland: Time once again for Marketplace Money's Summer School. This week, the difference between a tax credit and a tax deduction.
At the blackboard to explain is certified public accountant Nancy Chandler.
Nancy Chandler: A tax credit is an actual credit against your tax. Once your tax has been computed, it will reduce the tax, such as the Child Care Credit or a credit for purchasing a hybrid vehicle. A tax deduction reduces your taxable income before the tax is computed. Tax deductions are medical expenses, charitable contributions, real estate taxes and mortgage interest.
A tax credit is much better than a tax deduction because it's dollar for dollar against the tax. A tax deduction just reduces taxable income and taxable income may be taxed at 15 percent or 28 percent
Tax deductions can be limited as far as the amount you can write off. So if you purchase a computer for your business, you first have to go above 2 percent of your adjusted gross income and once you get there, then you can write the rest off.
Everyone is entitled to a standard deduction and if you're low income or if you have few itemized deductions, you may be better off taking the standard deduction rather than itemizing your deductions.
Vigeland: Nancy Chandler is with the firm Kellogg & Andelson here in Los Angeles. Next week, we go into universal default.
Comments
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From St. Paul, MN, 08/02/2008
I'd appreciate a future report on the status of the Education Tuition and Fee deduction versus the Education tax credits-Hope and Lifetime. I've had enrolled college students for the last six years, and these laws have helped a lot, but yearly changes are often so last minute, it makes planning tricky. thanks, Carole Smith
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