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

A tax deduction and tax credit are two important concepts in the Washington tax law. A tax deduction is an amount of money that can be subtracted from a person’s taxable income, thus reducing the amount of taxes they pay. For example, if a person had a taxable income of $30,000 and was entitled to a $3,000 tax deduction, their taxable income would then be $27,000, and the amount of tax they would owe would be reduced. On the other hand, a tax credit is a dollar-for-dollar amount that can be used to reduce the amount of taxes owed. For example, if a person had a tax liability of $3,000 and they were entitled to a $3,000 tax credit, the amount of tax they owe would be reduced to zero. In some cases, a taxpayer might be entitled to a tax credit that is greater than the amount of taxes they owe – in this case, the extra amount is refunded to the taxpayer. In summary, a tax deduction reduces the amount of income that is subject to taxation, while a tax credit directly reduces the amount of taxes owed. Tax deductions and credits can both help to reduce a person’s tax burden, and it is important to understand the difference between the two when filing taxes.

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

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