A tax deduction is offset against taxable income. For example, if your W-2 Federal wages are $76,000, and you sustained $3,000 of capital losses, this results in a tax deduction of $3,000 leading to $73,000 of taxable income before standard deduction and personal exemptions. Hence, a tax deduction will reduce the amount of taxable income subject to federal income tax.
A tax credit is an amount that is offset against a taxpayers tax liability. Hence lets assume you have a $3,000 tax credit, than assuming you have a tax liablity of $10,000 from say your taxable income of $50,000, the tax credit would reduce your absolute tax liability by $3,000 resulting in a net tax liability of $7,000.
Clearly what this means is that a $3,000 tax credit is more valuable than $3,000 tax deduction. This is because the tax deduction is really worth $3,000 x effective tax rate of the taxpayer, whereas a $3,000 tax credit is worth exactly that amount, $ 3,000! |