Tax Credit vs Tax Deduction

Tax Credit

A tax credit is better than a tax deduction because each dollar of credit reduces your tax liability by one dollar. For example, a $100 tax credit reduces a $500 tax liability to $400.

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Tax Deduction

On the other hand, each dollar of deduction only reduces your tax liability by a percentage of one dollar. The percentage depends on your tax bracket. For example, if you're in the 25% tax bracket, a $100 deduction reduces your tax liability by $25 (25% x $100).

As you can see in the above examples, a tax credit of $100 saved you $100 in taxes, while a $100 tax deduction saved you $25.

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