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TAX CREDIT VS. TAX DEDUCTION

  • Writer: Treavor Dodsworth CFP®, CPA, CKA®
    Treavor Dodsworth CFP®, CPA, CKA®
  • Jul 18
  • 1 min read

With the recent passage of the One Big Beautiful Bill Act there has been quite a bit of talk regarding various tax deductions and credits. Before discussing these items, it is helpful to know what a tax deduction or credit actually is.

Dollars In Your Pocket

A tax deduction typically reduces your taxable income. Therefore the actual tax benefit is almost always lower than the deduction. For example, a $1,000 deduction may only result in $250 of actual tax savings. What percentage you save on the deduction, depends on your tax bracket as well as what other items are impacted by your income.


A tax credit is typically a dollar for dollar benefit. For example, the child tax credit increasing from $2,000 to $2,200 in 2025 is an actual additional $200 benefit to those that qualify.


Knowing the difference between a tax credit and tax deduction will be a substantial help as you make financial decisions. For example, just because there is a new auto loan interest deduction doesn't mean it suddenly makes sense for everyone to take out an auto loan. Only some cars qualify, the max deduction is limited, there are income limits to the deduction, and it is just a tax deduction not credit. We are still believers the vast majority of people should seek to pay for their cars with cash instead of taking out auto loans.


Understanding income taxes may only be exciting to the odd few (myself included) but it can result in actual dollars in your pocket.

 
 

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