difference between deductions and credits

Question

Question

Answer 1

Answer #1

In income tax there are these two terms deductions and credits.
Although they seems to be similar but actually they have a lot different meanings.

These are the following differences between deductions and credits.

1. Deductions

Income tax allows various kinds of deductions. These deduction reduces the taxable income and hence lowers the tax liability of a person.
Another major thing is that deductions lowers the tax liability by lowering the taxable amount not by lowering the tax directly.
There is also sometimes the taxpayer have options to choose deductions or credits or either both of them.

2. Credits

It is a type of amount which directly reduces the tax liability of a taxpayer, for example, if there is a credit of $2,000 then the tax liability is directly lowered by $2,000.
Another thing is that Credits are of two types i.e refundable and non refundable.
Sometimes credits can even lower the taxable amount to zero (0).
Credits are also considered better than deductions.

Answer 2

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