Do you understand the difference between a TAX DEDUCTION and a TAX CREDIT?

Sep 6, 2022

Colloquial tax conversations often mistake tax credits and tax deductions as being one and the same but they are absolutely not. A tax deduction is NOT the same thing as a tax credit.

In fact, in my opinion, a tax credit is MORE VALUABLE than a tax deduction and here is why -> a tax credit reduces your tax due whereas a tax deduction reduces your taxable income on which your tax due is calculated. Got it?

So buying a $2,000 computer is a tax deduction for your business and reduces your taxable income from $10,000 down to $8,000. Now you pay tax on $8,000.

A $2,000 tax credit will reduce the tax you owe by $2,000. Much much bigger and better than a tax deduction.

I highly recommend that you discuss tax credits with your tax advisor. There are at least 73 tax credits that I know of. There must be at least one in that list that can apply to you and your business and save you money on your taxes. The list also expands every year as more credits are added so also please make sure that you regularly review the newest tax credits every year. Taking a tax credit to which you are entitled will not cause an audit.

Find a list at my Resources page on my website.

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