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Tax Credit?

posted 2 years ago in Legal
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    BriarRose0708    July 24, 2010  

    I was watching a t.v. show a few weeks ago when a commercial came on about a new car tax credit. I looked it up and we qualify for it. So my question is, what exactly is a tax credit?

    Thanks!

     
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    CorgiTales    February 1, 2011  

    Okay there are two main types of money you can get back at tax time and they are different (within these two there are subsets, but this is the basics). 

    There are deductions, and there are credits. Easiest way to explain is with a very simplified (and totally inaccurate) example. 

    Let's pretend you made 100,000 last year, and that your tax rate is 20% for the whole amount (again-- would never happen but it makes it easy). If you have no deductions or credits: 

    100,000 x 20% = you owe 20,000

    Now lets say you have a 10,000 DEDUCTION. You deduct that amount from the amount of your EARNINGS, so it looks like this: 

    100,000 - 10,000 (deduction) = 90,000 x 20% =  you owe 18,000

    Now lets say you have a 10,000 CREDIT. this is money that you take right off of the amount due. 

    100,000 x 20% = 20,000 - 10,000 (credit) = you owe 10,000 

    So a credit is much much better than a deduction! hope that helps

     

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