A college student can be worth $2,500 under the American Opportunity Credit.
Last week I wrote about three educational and energy credits that reduce your taxes. I mentioned one deduction, too. So what’s the difference between a tax credit and a tax deduction?
A tax credit directly reduces the taxes you owe. So if you do your taxes and owe Uncle Sam $5,000, a $2,500 tax credit means you pay just $2,500 in taxes.
A tax deduction reduces your taxable income, which is what determines how much tax you pay. So if your gross income was $45,000, a $2,000 tax deduction means you pay taxes on $43,000.
In short, a tax credit saves you a lot more money than a tax deduction, so never skip a chance to claim a valid tax credit. Got questions? Leave a comment and I’ll do my best to answer.
Welcome to Bargain Babe! I’m Mara, and I’m so glad you’re here. I am an obsessive bargain hunter and penny pincher, and I am determined to live a full life without EVER paying full price.
There are two kinds of tax credits. Nonrefundable tax credit can reduce your tax liability to zero, but not below. Even if your credit is larger than your tax, you do not get a refund. Refundable credit refunds you the difference. For example, your tax is $1,000 and your tax credit is $1,200. Not only that you don’t need to pay tax, you can get the refund of $200. Most tax credits are nonrefundable. The most popular refundable credit is earned income credit.
Yes, surely, check if you can claim any tax credits. The one I claim every year is the retirement savings contribution credit. It saves me a lot of money legally.