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A tax credit is simply a cut on tax bills on a dollar-for-dollar basis. With that said, let us take a closer look at what tax credits are and how they work!
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Tax Bill [Photo: Shutterstock]
According to Ramsey Solutions, tax credits can also be considered money in the bank. The more tax credits one has, the less money they have to pay to the government. Most tax credits are connected with one’s age, income, or status of filing. They intend to provide additional cash to individuals with children, with disabilities, or those with low to average incomes.
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Difference Between Tax Deduction and Tax Credit
According to Ramsey Solutions, tax deductions are somewhat related to tax credits. However, deductions do not directly reduce the tax bills. Instead, tax deductions reduce the taxable income. In turn, if the taxable income lowers, the tax bill also lowers. For example, if a taxpayer is in a 22% tax bracket, a $1,000 tax deduction will lower the taxable income by cutting the tax bill by $220. On the other hand, a taxpayer will save exactly $1,000 for a $1,000 in tax credits.
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