Advertisement
Tax Breaks

Tax Credit vs. Deduction

If you have to choose one or the other, take the credit -- it's worth more.

I could never figure out the difference between a tax credit and a tax deduction. I would appreciate some clarification on this subject. Thanks.

Good question -- especially this time of year. A tax credit lowers your tax bill dollar for dollar. A deduction shaves money off your taxable income, so the value depends on your tax bracket. If you're in the 25% bracket, a $1,000 deduction lowers your tax bill by $250. But a $1,000 credit lowers the bill by the full $1,000, no matter in which bracket you are.

Advertisement - Article continues below

This difference becomes important, for example, if you pay college tuition and you're choosing between taking the Hope tax credit or the tuition deduction. The Hope credit can lower your tax bill by up to $1,650 per child in the first two years of college (the Lifetime Learning credit can reduce your taxes by up to $2,000 after that). To qualify for those tax credits for 2006, though, your income must be less than $110,000 if married filing jointly, or $55,000 for single filers.

If you can't qualify for this credit, you still may be able to take the tuition deduction, which lets you deduct up to $4,000 in qualified college expenses you paid during the year. If you are in the 25% tax bracket, then this deduction can lower your tax bill by $1,000.

Advertisement
Advertisement - Article continues below

If you qualify for either the Hope credit or the tuition deduction, the Hope credit is more valuable (you can't take both tax breaks in the same year). But if you earn too much to take the Hope, then the tuition deduction can still shave some money off your tax bill. To qualify for the full $4,000 deduction, your adjusted gross income must be $130,000 or less in 2006 if married filing jointly ($65,000 or less if single). You can deduct up to $2,000 in tuition and fees if your joint income was $160,000 or less ($80,000 or less if single). There is no deduction if you earn more than that. You don't need to itemize to qualify.

See Don't Miss the Tuition Deduction for special rules about how to claim the tuition deduction for your 2006 taxes because the tax law was renewed so late in the year that it wasn't included on the tax forms.

For more information about the rules for both tax breaks for paying college tuition, see IRS Publication 970 Tax Benefits for Education.

For more help with your taxes, visit the Kiplinger Tax Center.

Advertisement
Advertisement

Most Popular

Medicare Basics: 11 Things You Need to Know
Medicare

Medicare Basics: 11 Things You Need to Know

There's Medicare Part A, Part B, Part D, medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare --…
September 16, 2020
5 Unfortunate Estate Planning Myths You Probably Believe
estate planning

5 Unfortunate Estate Planning Myths You Probably Believe

These all-too-common misconceptions can steer your estate plans in the wrong direction right from the start. Here’s how to overcome them and tips to b…
September 17, 2020
Election 2020: Joe Biden's Tax Plans
taxes

Election 2020: Joe Biden's Tax Plans

With the economy in trouble, tax policy takes on added importance in the 2020 presidential election. So, let's take a look at what Joe Biden has said …
September 18, 2020

Recommended

10 States With the Lowest Beer Taxes
Tax Breaks

10 States With the Lowest Beer Taxes

If you want to get a brew that won't strain your wallet, consider pouring up in these 10 states.
September 18, 2020
10 States With the Highest Beer Taxes
Tax Breaks

10 States With the Highest Beer Taxes

Find out where you'll spend the most money on some suds.
September 18, 2020
Child Tax Credit Would Go Up Under Biden Proposal
Politics

Child Tax Credit Would Go Up Under Biden Proposal

Some families would see their tax credit jump from $2,000 to $3,600 per child under Joe Biden's plan. But there are a couple of important catches.
September 18, 2020
Election 2020: Joe Biden's Tax Plans
taxes

Election 2020: Joe Biden's Tax Plans

With the economy in trouble, tax policy takes on added importance in the 2020 presidential election. So, let's take a look at what Joe Biden has said …
September 18, 2020