The Difference Between Tax Deductions And Tax Credits

income tax deductions and credits

The Difference Between Tax Deductions And Tax CreditsUnderstanding the difference between a tax deductions and a tax credits will help you to apply strategies and use financial tools to help reduce the taxes you pay on your retirement income.

Tax Deductions

Tax deductions are subtracted from total income to arrive at the net and taxable income figures. Any deduction serves to lower the net or taxable income figure. This has a positive effect on your income tax calculation since it will reduce tax at the highest marginal rate.
As such, the value of a tax deduction increases as your income increases.

Tax Credits

Tax credits operate differently. Once calculated, the basic federal tax is reduced by federal tax credits, which include the personal credit, age and pension credits, dividend tax credit, spousal credit and medical expense credit. The resulting number is the federal tax payable. A credit is actually more beneficial than a deduction at lower income levels because it is a dollar-for-dollar reduction in tax payable at the lowest marginal rate.
There are two important tax credits that apply directly to your retirement income planning, the pension credit and the age credit. In retirement, when you are drawing your income from assets and benefits, few tax deductions are available unless you also have employment or rental income.
It’s recommended seeking the advice of a tax professional to make sure you getting the most out of your tax deductions and tax credits.