What is the difference between a tax deduction, tax credit, and income exclusion?

A tax credit is much more valuable than a deduction or income exclusion. A tax credit reduces your taxes, but a deduction reduces your taxable amount. Here's an axample:





Income: $40k


Tax deduction: $1k


Tax rate: 30%


Tax: 0.3*(40-1) = $11,700





Income: $40k


Tax credit: $1k


Tax rate: 30%


Tax: 0.3*(40)-1 = $11,000





Tax deductions and income exclusions have the same effect, but a different cause. Income exclusions apply to money that was not taxable in the first place (for example, some money earned in a foriegn country), but deductions usually relate to spending and charity.

What is the difference between a tax deduction, tax credit, and income exclusion?
Easy.


a tax deduction is a specific allowance offsetting a portion of tax liability.


a tax credit applies a specific amount against taxes due


income exclusion refers to income not subject to taxes.
Reply:income exclusion, the item never makes it to the tax income line of the tax return.





Deduction, reduces income before tax is calculated.





Credit, reduces income tax. Dollar for dollar, a credit is better than the same size deduction.

lilac