Tax Credit vs. Deduction: What’s the Difference?

Philanthropists like you often claim their donations as either deductions or tax credits, getting back a reward for their giving nature. It is essential to understand the differences between deductions and tax credits. Doing so will make it simpler for you to handle the challenges of this process and get the most reward for your donations.

What are Deductions?

Tax deductions are the most common way to cut back on your taxes and include various write-offs that you can use to minimize how much you owe. However, your deductions are not calculated using a 1-for-1 rate. That is to say, if your deductions are $12,000 or so, there are several formulas used to figure out how much this cuts out of your taxes – certainly not the total amount.

The different calculations used to figure out this amount are too complex to discuss in-depth in this article. However, they include various concepts created by the IRS and state tax officials to balance how much you owe with what you have spent. The idea is to create a fair understanding of how much these deductions impacted your taxes and give tax officials an excellent chance to collect decent money.

How Do Tax Credits Differ?

Tax credits are similar to deductions, as the “Working Poor Tax Credit,” an option that dates to 1998 and is now called the Qualifying Charitable Organizations tax credit. Like deductions, these credits are used to reduce the amount of money that you owe. However, tax credits usually reward people with a community service opportunity to give money to groups that qualify.

When deducted from your taxes, these credits are calculated on a 1-for-1 basis. So if you gave $2,500 in tax credits to a qualifying organization, you would get that much money off of your payment. However, this option is usually limited to pretty specific organizations, which are often changed and updated throughout various tax years to create the most accurate understanding of this process possible.

Getting the Most Out of Your Donations

If you want to give to various groups and would like benefits, tax credits are probably the best option. That said, deductions are also a good choice for the philanthropic. Of course, few true humanists give money just to get cashback on their taxes. However, your giving nature deserves a reward, and deductions and tax credits help make this process more rewarding.

To learn more about this topic, as well as how your donations help those suffering from hunger, poverty, and homelessness, call Paz de Cristo today. We’ll do everything we can to make it easier for you to help feed, clothe, and empower.