How do tax credits and deductions affect taxes?
Below is the full transcript for the above video.
Credits and deductions both reduce your tax bill but in different ways.
Tax credits reduce the amount of taxes you owe dollar for dollar. So, if you owe $7,000 in taxes, a $2,000 tax credit will reduce the taxes you owe to $5,000. Common tax credits include the Earned Income Tax Credit, Child and Dependent Care Credit, and the American Opportunity Tax Credit.
On the other hand, tax deductions reduce the amount of income you'll owe taxes on. So, if you made $45,000 and get $2,000 in deductions, the IRS will only tax you on $43,000.
Since credits and deductions reduce your tax bill, they may also increase your refund, if you are getting one this year.
TurboTax automatically checks for more than 350 credits and deductions. We'll ask you questions along the way to make sure you get every dollar you deserve.
