What’s The Difference Between A Tax Credit And Tax Deduction?

In January, The Juice plans to start the year with a focus on investing and personal finance basics and how you can take them to the next level to enhance what you’re already doing. We think this will be a good way to start 2025. Particularly because the political situation could still be crazy. 

We’ll see. But no matter what happens in Washington, you have control over your pocketbook. Your money. Whether you’re spending, saving, investing or paying taxes on it. 

Presidents and the Congress barely move the needle on stock market performance. And, as we noted last month, aside from how they want to handle the filthy rich, Kamala Harris and Donald Trump actually aren’t all that different on taxes. 

So, the best thing you can do is use your understanding of how taxes work to your benefit. Therefore, when the dust settles post-inauguration and on the New Year, The Juice will spend a good chunk, though not all of February helping you prepare for the April tax deadline.

Like always, we have your personal finance and investing back from all of the angles that matter most. 

Which leads us to something lots of people confuse: tax credits and tax deductions. 

• A tax deduction decreases your taxable income. 
• A tax credit is a dollar-for-dollar decrease in how much money you owe. 

et’s consider a tax deduction first, using the 2024 tax brackets.

To illustrate, we’re going to keep this super simple. 

So, let’s use a single filer, who earned $100,525 in 2024. 

If you earned this amount—

• Your first $11,600 is taxed at a rate of 10%. 
• The amount between $11,601 and $47,150 is taxed at a rate of 12%. 
• And the amount between $47,151 and $100,525 is taxed at a rate of 22%. 

This said, if you earned $100,525 in 2024, you won’t be taxed on that amount. 

At the very least, you’ll claim the standard deduction for a single filer in 2024 —$14,600 — and reduce your taxable income by that amount. So,  your taxable income is now $85,925, meaning that considerably less of your income is taxed at that 22% rate. 

Your tax software or account can help you find deductions you qualify for to help reduce your taxable income even more. 

If you contribute to a traditional IRA, you can deduct up to $7,000 ($8,000 if you’re 50 or older) from your taxable income. In our hypothetical taxpayer’s case, this brings taxable income down to $78,925. 

We ran these numbers through a tax calculator and found that the total tax due on $78,925 in this case would be about $12,417. Of course, your employer should be taking money out of each paycheck so you won’t necessarily owe this amount or get a refund. It just represents how much tax you’re obligated to pay based on your gross income, adjusted for deductions. 

Now, let’s throw a tax credit into the mix. 

If this single filer reported one dependent eligible for the child tax credit, they would receive a $2,000 tax credit. While this doesn’t reduce the taxpayer’s taxable income, it reduces the tax due, bringing it to $10,417. 

Here again, your tax software or account can help you find credits that you qualify for. 

As we explained in that Juice about Harris and Trump on taxes, this is one area where they do differ:

Harris would like to make the child tax credit refundable, which means you would receive this credit (if you qualify) as a refund even if you have no tax liability. Republicans tend to oppose refundable credits, which tend to benefit lower-income taxpayers who often have no taxes due.

Let’s say this taxpayer made considerably less money and had no tax due. Under Harris’s plan, they would receive their child tax credit as cash. As a refund. 

Stick with The Juice through election and then tax season. We’ll continue to help you make sense of what it all means for your money, be it spending, saving, investing or taxes. 

The Bottom Line: Like with investing, it’s important to have a handle on basic tax terminology. Especially if you do your taxes yourself, it can help you save money on taxes. It also highlights the power of looking for pre- and post-tax deductions as a way to reduce your taxable income, particularly if you make too much money to qualify for tax credits.

• 1 Stock to Buy as AI Data Centers Send Water Demand Soaring
• Unlock Daily Stock Gems – FinPro Secrets Spilled!
• The World’s 5 Most Popular Stocks: Should You Buy Them?
• Check Out The Juice’s Favorite ETF Screen