No one wants to pay more taxes than they have to. In the past, you’ve probably relied on tax credits and deductions to help you pay fewer taxes, but which one is more beneficial? Should you use credits or deductions to lower what you owe on your yearly taxes?
A tax credit is an amount you can subtract from the taxes you owe. Unlike a deduction, which reduces your yearly taxable income, you can use tax credits to reduce the amount you owe. There are different types of credits you can use, all with different values.
Tax credits may promote a specific behavior and can be an incentive for people to take part in certain activities. An example is receiving a tax credit for replacing old appliances with new, more efficient appliances.
A tax deduction lowers your tax liability by lowering your taxable income. Your deductions can come from expenses you incurred over the last year that you can then subtract from your gross income. By reducing your gross taxable income, you decrease how much you owe in taxes.
Like credits, state and federal governments use deductions to encourage people to participate in service programs that benefit individual communities.
You have the option to use a standard or an itemized deduction.
Which is Better?
So, if both tax credits and tax deductions help you spend less on your taxes, which should you prioritize?
The short answer is tax credits are often more favorable than tax deductions. Credits reduce your taxes dollar-for-dollar, whereas deductions reduce your taxes by a specific percentage. If you are in the 22% tax bracket, a tax deduction can save you $.22 for every dollar deducted. A credit would save you a full $1.
If you have the option to use a tax credit or a tax deduction for the same expenses, it’s a good idea to run the numbers and see which yields a better result. We can ensure your tax strategy aligns with the financial goals and future you’ve discussed with us. Please reach out to the office with any questions you may have.
This material was developed and prepared by a third party for use by your Registered Representative. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. The content is developed from sources believed to be providing accurate information.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
Tax Credits vs Tax Deductions
January 03, 2022