Tax Credit Vs Tax Deduction. Let us first find out what tax credit and tax deduction are first. In a nutshell, both tax deduction and tax credit have similar effects:  basically, they reduce the amount of the tax owed to the IRS (Internal Revenue service.).But they do have many differences. They differ in the way they are calculated, the affect on the over all tax payable, filing and reporting, and the eligibility of the tax payers.

How Tax Credit and Tax Deduction affect tax reduction?

The main difference between tax credit and tax deduction lies on how it reduces the amount of tax to be paid. Tax credit usually has a greater impact on tax reduction due to the fact that it directly affects the total tax due. It is also known as “below-the-line” item. There would be a lesser reduction on a tax deduction just because it affext only the tax payer’s gross taxable income. Items included in a tax deduction are called above the line.

Reporting and Calculation of Tax Credit And Tax Deduction.

It is easy to calculate tax credit. Generally it is a percentage of an expense. Deductions, on the other hand, are total reductions against your taxable income. Tax forms such as Retirement Savings Contribution are used for tax credit. Here you will need to make use of the IRS Form 8880 for you to get to claim the credit. Documents in the form of worksheets are used to calculate tax deduction and the amount would be subtracted from your taxable income.

For reporting of both tax credit and tax deductions, an IRS Form 1040 is required. Tax deductions are reported under Schedule A. Tax credits reports need more specific tax credit forms. If you have different tax credits to report, then they should be filed under each corresponding forms. With tax deductions, however, you can use Schedule A to record all of them.

Who are eligible for Tax Credits and Tax Deductions?

There are different kinds of tax credits. So the eligibility of a tax payer is dependent on the tax credit one is applying for.Take for example the tax credit for first time home buyers. Single individuals who are making less than $95000 a year or married couples who are earning less than $150000 a year are eligible for the $8000 dollar first time home buyer tax credit. . This limit is usually based on one’s modified adjusted gross yearly income. And to claim the refund, the IRS form 8839 is required.

Tax deductions are not as complex. One gets deductions on expenses like accrued interest on loans or mortgages, education expenses, expenses accrued due to accidents, casualties, robbery and the like. It is so much easier to be eligible for tax deduction than tax credits since tax credits cover more specific criteria to qualify. Another difference is that tax deductions is determinant of the tax you owe the government. Tax credits on the other hand are usually used by the government as stimulus programs. A good example of this would be the first time home buyer tax credit. Tax credit is granted to home buyers who would not be able to afford to buy a home if not for the credit provided.