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

Tax deductions and tax credits are commonly confused because they both reduce the amount of taxes you owe to the state. The difference between the two is that deductions are subtracted from your taxable income, reducing the amount of income you have to pay taxes on. Tax credits, on the other hand, are a dollar-for-dollar reduction of the taxes you owe. In Arizona, a tax deduction might include charitable donations, medical expenses, and personal property taxes. These deductions reduce the amount of income that is taxable and, in turn, the amount of taxes you owe. For example, if you make $50,000 a year and donate $2,000 to charity, you would only be taxed on $48,000 of your income. Tax credits, however, are a direct reduction of the taxes you owe. For example, in Arizona you can claim tax credits for dependent care costs, energy efficiency improvements, and college tuition. These credits will directly reduce the amount of taxes you owe to the state. For example, if you owe the state $1,000 in taxes and have a $1,000 credit, your tax bill would be zero. Ultimately, the most important difference between tax deductions and tax credits is that tax deductions reduce the amount of income you are taxed on while tax credits are a direct reduction to the amount of taxes you owe. Both deductions and credits are important strategies to reduce your taxable income in Arizona, so it is important to understand the advantages of each.

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

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