I could never figure out the difference between a tax credit and a tax deduction. I would appreciate some clarification on this subject. Thanks.
Good question -- especially this time of year. A tax credit lowers your tax bill dollar for dollar. A deduction shaves money off your taxable income, so the value depends on your tax bracket. If you're in the 25% bracket, a $1,000 deduction lowers your tax bill by $250. But a $1,000 credit lowers the bill by the full $1,000, no matter in which bracket you are.
This difference becomes important, for example, if you pay college tuition and you're choosing between taking the Hope tax credit or the tuition deduction. The Hope credit can lower your tax bill by up to $1,650 per child in the first two years of college (the Lifetime Learning credit can reduce your taxes by up to $2,000 after that). To qualify for those tax credits for 2006, though, your income must be less than $110,000 if married filing jointly, or $55,000 for single filers.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If you can't qualify for this credit, you still may be able to take the tuition deduction, which lets you deduct up to $4,000 in qualified college expenses you paid during the year. If you are in the 25% tax bracket, then this deduction can lower your tax bill by $1,000.
If you qualify for either the Hope credit or the tuition deduction, the Hope credit is more valuable (you can't take both tax breaks in the same year). But if you earn too much to take the Hope, then the tuition deduction can still shave some money off your tax bill. To qualify for the full $4,000 deduction, your adjusted gross income must be $130,000 or less in 2006 if married filing jointly ($65,000 or less if single). You can deduct up to $2,000 in tuition and fees if your joint income was $160,000 or less ($80,000 or less if single). There is no deduction if you earn more than that. You don't need to itemize to qualify.
See Don't Miss the Tuition Deduction for special rules about how to claim the tuition deduction for your 2006 taxes because the tax law was renewed so late in the year that it wasn't included on the tax forms.
For more information about the rules for both tax breaks for paying college tuition, see IRS Publication 970 Tax Benefits for Education.
For more help with your taxes, visit the Kiplinger Tax Center.
-
Stock Market Today: Dow Dives 1,123 Points After FedMarket participants reacted predictably to a well-telegraphed hawkish turn by the Federal Reserve.
-
Fed Sees Fewer Rate Cuts in 2025: What the Experts Are SayingFederal Reserve The Federal Reserve cut interest rates as expected, but the future path of borrowing costs became more opaque.
-
New Law Delivers Tax Breaks to Natural Disaster Victims, But Is It Enough?Tax Relief The legislation provides critical tax relief to thousands of natural disaster victims across the country.
-
Five Tax-Savvy Ways To Donate This Holiday SeasonCharitable Donations Food pantries, toy drives, and animal sanctuaries are popular ways to support others year-round.
-
Can Tariffs Make Childcare More Affordable?Tariffs President-elect Trump suggested tariffs can address the childcare crisis, but economists are doubtful.
-
Are You a Renter? You Could Save on TaxesTax Breaks With these tax savings at your fingertips, rent may be more affordable
-
2025 Open Enrollment: Some DACA Recipients Can Purchase Affordable Care Act Health InsuranceOpen Enrollment Your eligibility to purchase health insurance from the federal marketplace may have changed. Here's what you need to know.
-
Holiday Shopping Tax Tips for Business OwnersTax Deductions Before hitting the sales, businesses should know these key deductions and look out for overspending.
-
NYC Congestion Pricing: Ghost Tax or Necessary Fee?State Taxes Drivers headed to Manhattan’s downtown district will face a new $9 toll in January.
-
Tax Credit vs. Tax Deduction: What’s the Difference?Tax Breaks Your guide to tax deductions and credits, how the IRS treats them differently, and how they impact your tax bill.
