Your Tax Question - 039

Dear John, I'm not exactly sure what the difference is between a deduction and and a credit, could you explain it to me? Thank you, Jim-Bob
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Hi Jim-Bob,

Sure thing, a deduction reduces the amount of income that you pay taxes on and a credit reduces the amount of tax that you actually pay. For instance, in the Adjusted Gross Income section of the form 1040 you can enter certain expenses that you may have during the year and they will reduce the income that you earned and it is that reduced income that is used to with your Itemized or Standard Deductions to determine your Taxable Income and it from your Taxable Income that your Tax is determined. Then, after the Tax is determined Credits are figured and these reduce the Tax amount.

There are 2 types of Credits: Refundable and Non-refundable. A Refundable Credit is one that gives you back money even if the Tax that you owe is $0.00 and Non-Refundable credits do not give any money if you are not paying taxes. The Child Credit is a Refundable Credit so this is why you hear of people getting money back even when they are too poor to pay taxes.

I hope this answers your question Jim-Bob,
John

PS. Congress is not likely to continue the tax cuts and credits that were enacted during the Bush administration which means that many of the tax Refunds and Credits that you now enjoy will end after your next tax season. If you need help figuring out what happens, email me.