What is the difference between a deduction and a credit?

A deduction and a credit are two different kinds of tax benefits. A deduction lowers a taxpayer’s taxable income, while a credit lowers the taxpayer’s tax liability. In California, deductions are taken from taxable income before the tax rate is applied. This mean that the amount of tax owed is reduced by the amount of deductible expenses. A credit, on the other hand, is taken after the tax is computed and reduces the amount of tax owed dollar for dollar. For example, let’s say a taxpayer has taxable income of $50,000 and takes a $5,000 deduction. That would bring their taxable income to $45,000 and the tax rate is applied to that amount. Now if a taxpayer has taxable income of $50,000 and also takes a $5,000 credit, that $5,000 is taken directly off of the amount of tax they owe. So if they owe $3,000 in taxes, the credit reduces that to $2,000. The difference between a deduction and a credit is whether it reduces taxable income or tax liability. In California, a deduction reduces taxable income while a credit lowers the amount of tax to be paid dollar for dollar.

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