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NC State Extension Economist Dr. Mike Walden -“Tax Deductions vs. Tax Credits”

Mary:  This is Mary Walden with economist MW, welcoming you to the economic perspective.  Today’s program looks at tax deductions versus tax credits.  Mike, as the presidential candidates have been outlining their economic plans, we’re hearing many tax terms used.   Two that I’ve heard are tax deduction and tax credit.  What’s the difference between the two?

Mike:  Summary Answer

a.     Has come up in the major candidates’ plans to help families with child care costs

b.    A tax credit means you directly reduce your taxes owed

c.    So, a $1000 tax credit applied to a $3000 amount owed on taxes reduce the taxes you owe to $2000 d.    A tax deduction reduces your taxes owed by the amount of the deduction multiplied by your tax rate e.    So, a $1000 tax deduction used for someone with a 25% tax rate and a $3000 amount owned reduces that bill by 25% of $1000 – or $250 – so the tax owed goes to $2750

f.    Obviously, tax credits are more valuable

g.    One question for both – if family already pays very little tax (usually talking about income tax), so the credit or deduction means they owe a negative amount of taxes, what happens?

h.    I’m MW

Mary:  And I’m Mary Walden for the North Carolina Cooperative Extension Service