Comments on: Tax Credit vs. Tax Deduction

By: Gregg

Gregg — Fri, 13 Feb 2009 01:15:28 +0000

I’ve been following this pretty closely (probably too closely at times) and want to be sure I am not just reading how it works based on what I WANT it to do.

In the event that you are due a tax refund, let’s say $1500, would the $7500 tax credit then result in a $9000 overall tax refund?

By: lillian

lillian — Tue, 07 Oct 2008 21:21:47 +0000

For Bobert’s comment, I don’t get it! Why $250 in federal income tax – could be possibly as much as $913! Could you explain more. thanks!

By: jim

jim — Tue, 08 Jul 2008 17:52:09 +0000

Rob – That’s an excellent point and thank you for sharing it, you are totally right. Reduce your AGI and you might move the needle enough to get access to things you otherwise could’ve have, like Roth IRAs and the like.

By: Robert D Flach

Robert D Flach — Tue, 08 Jul 2008 17:46:43 +0000

Jim-

Some deductions are worth more than others.

Deductions that reduce Adjusted Gross Income (AGI), like Traditional IRA and 401(k) contributions and student loan interest, are much more valuable than itemized deductions like mortgage loan interest and charitable donations.

This is because many deductions and credits are “phased out” or disallowed, and certain items of taxable income are increased, based on a taxpayer’s AGI.

You indicate “If you are in the 25% tax bracket, a $1000 tax deduction means you will pay $250 less tax that year”. In the case of a deduction that reduces AGI a $1000 tax deduction could save you a lot more than $250 in federal income tax – possibly as much as $913!

The Wandering Tax Pro

By: Alisa

Alisa — Mon, 07 Jul 2008 22:50:04 +0000

There are some definite tax advantages in being a business owner. There are so many expenses that you may be able to deduct to reduce your taxable income. I just started my investment journey and as I am still learning so much about the stock market, I want to minimize any activities that would result in a taxabale event. Although, I believe, the tax amount is less where stocks are concerned, but, there is still a tax that must be paid if any income is generated. I am learning so much on this journey:

Be well.

By: Brandon

Brandon — Mon, 07 Jul 2008 18:22:15 +0000

It is worth mentioning that some credits are refundable while others are not. A refundable credit will give you a refund if it reduces your tax liability below $0 while a non-refundable credit will be reduced if it would have made your tax liability below $0.

Example:
If I would be due to pay $900 in taxes in a year and receive a $1000 refundable credit, I would get all the money I had put in for taxes back and an additional $100. If the credit was non-refundable, I would only get the money I had put in for taxes back.