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

A tax deduction and a tax credit are two different ways the State of Maryland offers its taxpayers to reduce their tax liability. A tax deduction is an amount of money that you can subtract from your income before calculating your taxable income. This lowers your taxable income, which in turn reduces the amount of tax you will owe. For example, if your total taxable income is $50,000 and you take a $3,000 deduction, your taxable income is reduced to $47,000. A tax credit, on the other hand, is a dollar-for-dollar reduction of taxes owed. A tax credit is subtracted from the amount of taxes owed, rather than from the taxable income. For example, if you owe $5,000 on your taxes and you receive a $2,000 tax credit, your taxes due reduce to $3,000. Tax deductions and tax credits both help to reduce your tax liability. However, tax credits are more beneficial as they are deducted from the amount of tax you owe, instead of from your taxable income. Therefore, it is important to understand the difference between the two and to take advantage of any tax deductions or credits that may be available to you.

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

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