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November 5, 2019

Tax Credits vs. Tax Deductions: Knowing the Difference


If you’re like most American income earners, you probably want to spend as little as possible on tax payment. While reviewing the process, you might come across two terms that may seem quite similar to you—tax credits and tax deductions. Although these two can both significantly reduce your tax bill, there is a distinction between them.

Tax Credits vs. Tax Deductions

To fully grasp how these concepts work, we need to understand what each term means. Both were designed by the Internal Revenue Service (IRS) so that an individual or a business can reduce their tax bills.

A tax credit is an amount that is directly deducted to the amount of taxes you owe. Take for example, your adjusted gross income (AGI) is at $100,000 and you have a $10,000 credit. The amount you owe to the IRS is 18,289.50 but with the tax credit, your tax bill is trimmed down to $8,289.50.

A tax deduction, on the other hand, is an amount subtracted from your gross income. Since your income is significantly reduced (thanks to the deduction), you’ll pay a lesser amount in taxes. This means if your AGI is at $100,000 and you have a $10,000 deduction, your taxable income only amounts to $90,000.

How Tax Credits and Deductions Work in Different Aspects

  • Retirement Savings Credit and Deductions

If you have a Saver’s Credit, you may be eligible to claim for 10%, 20%, or 50% tax credit from your retirement plan or Individual Retirement Account (IRA) contributions. However, the amount of credit you’ll get will only be limited to $2,000 or $4,000 if you’re married and filing jointly. Tax credits from retirement savings may be beneficial for those who belong in the low-income bracket.

You may also get a tax deduction from the payments you made to the traditional IRA. However, this will only be applicable to the traditional IRA since Roth IRAs or special retirement accounts will still be subject to investment taxes.

  • Educational Credit and Deductions

Students may be able to apply for a tax credit by taking advantage of either the American Opportunity Credit or the Lifetime Learning Credit. The American Opportunity Credit allows a half-time course student with at least $2,500 tax credits for educational expenses on two conditions—if they are not classified as a dependent and if they don’t have any history of a felony. On the other hand, the Lifetime Learning Credit allows a tax credit up to $2,000 as long as the student’s AGI doesn’t exceed $66,000.

Tax deductions for education can be obtained from student loans. The interest that you pay for your student loan can be used to claim for a tax deduction up to $2,500.

  • Self-Employment Credit and Deductions

You can enjoy tax deduction benefits from being self-employed. For instance, you can add up all your expenses for office supplies, vehicles, and mortgage interest and then deduct the amount from your income.

  • Green Energy Credit and Deductions

Helping Mother Nature by going green can get you credits, but it won’t be qualified for a tax deduction. If you’ve purchased a rechargeable four-wheel vehicle, you’re eligible to file a tax credit amounting to $2,500 to $7,500. You can also subtract up to 30% of your solar panel costs.

These are just some of the differences between tax credits and tax deductions. To know more about them, you can always use the U.S. Tax Code for reference.

Gain Tax Deductions by Making a Donation!

If your goal for this year is to reduce your tax bill, you can always count on charitable donations to get you a tax deduction. When you donate a vehicle to Veteran Car Donations, you not only get a tax break, but you also get to help veterans who are suffering from service-connected disabilities, mental health issues, lack of jobs, and homelessness due to poverty.

We will auction off your donated vehicle and use the proceeds to support the programs of our IRS-certified 501(c)3 nonprofit partners that provide needy veterans with mortgage-free and specially adapted homes, free mental health care, employment opportunities, job training, transitioning assistance, tutoring support and education scholarships, financial assistance, life skills training, counseling, and many other benefits.

You will also benefit from your vehicle donation since this will entitle you to claim a top tax deduction in the next tax season. Aside from this, you’ll also get to enjoy our free pickup and towing services and our smooth, quick, and no-paperwork donation process.

For more information on our car donation program, check out our FAQs page. For inquiries, you can call us at 877-594-5822 or send us a message online.

You can donate to Veteran Car Donations by filling out our secure online donation form or calling us directly. We accept donations of nearly all types of vehicles wherever you are in the United States since we have car donation programs in all 50 states.

Better Quality of Life for Vets with Your Car Donation!

Indeed, your vehicle donation matters a lot to our beneficiaries and to you as well! Call us at 877-594-5822 if you want to help the struggling veterans in your community achieve a better quality of life with your car donation!

Veteran Car Donations operates in all 50 states.

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Or call (877) 594-5822!