Question

Why does the IRS differentiate between a tax credit and a tax deduction?

Answer 1

The differentiation between tax credit and tax deduction is as follows

Tax credit :- tax credit reduces the amount of taxes that you owe.

Wall climbing tax credits could leave you with a bigger refund, some credits or non refundable. this means that if the credit reduces your tax liability to a negative number, what's left over cannot be used to increase the size of your tax refund.

on the other hand there are some triple double tax credit can help boost your tax refund. The income tax credit is a refundable tax credit. there are also some partial refundable tax credits like American opportunity tax credit.

Tax deduction :- tax deductions lower your taxable income for the taxable year

There are two ways to claim tax deduction

One option is to claim standard deduction which is is this kind of deduction that any tax payer in claim automatically. the amount of deduction will depend on your filing status.

For example :- the largest standard deduction is set a set for married couples filing a joint tax return.

if you don't want to take standard deduction, you can itemize your deductions. itemizing your directions generally makes the most sense if you are total deductible expenses are higher than the standard deduction.

Majorly any expenses incurred by the taxable person for that time period will be allowed as deductions.

tax credits are generally considered to be better than tax deductions because they directly reduce the amount of tax you the effect of transaction on your tax liability depends on your marginal tax bracket.

As a conclusion we can say that tax credit will reduce the amount of taxes and tax deductions will reduce the taxable income.

These are all the information required to solve the given question.

I hope, all the above mentioned information and explanations are useful and helpful to you.

Thank you.