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It is important to identify the distinction between tax credits and tax deductions. Credits and deductions are different in how they affect an individual’s tax obligations. 

 

What is Tax Credit?

 

A tax credit lessens an individual’s total amount of tax debt owed to the government or tax liability on a dollar-for-dollar basis. It is a tax incentive that allows taxpayers to deduct the amount of the credit they have acquired from the total they owe to the state. To put it simply, it reduces tax. An individual’s tax obligation is reduced by the amount claimed to be as a tax credit.  

Comparing-Tax-Credit-With-Tax-Deductions-nztravelhouse

 

What is a Tax Deduction?

 

On the other hand, a tax deduction lessens an individual’s taxable income. It is a reduction of income that can be taxed, a common result of expenses such as those incurred to produce additional income. It is a form of tax incentive along with exemptions and credits. So in a nutshell, deductions and exemptions reduce taxable income. An individual’s taxable income is reduced by the amount claimed as a tax deduction. And based on the calculation from the income bracket, the individual pays a tax on the amount left over after deductions are subtracted. 

Looking At It In Figures

 

For example, if a single taxpayer with $30,000 in taxable income and an Arizona State tax rate of 3%. The taxpayer’s Arizona state tax liability is $900 (3% of $30,000). Arizona State Income Tax Rates can be found on the IRS website. 

 

Here’s a scenario using the taxpayer’s Arizona state tax liability above. An individual has donated $300 to a Qualifying Charitable Organization (QCO) and $400 to a Qualifying Foster Care Charitable Organization (QFCO); then takes the $300 maximum allowable tax credit for a gift to a QCO, and the $400 Maximum tax credit allowed for a gift to a QCFO. In this situation, these two tax credits would reduce the individual taxpayer’s liability by $700 ($300 + $400), from $900 to $200. The individual would only end up paying $200 to the State of Arizona.

 

Comparing-Tax-Credit-With-Tax-Deductions-nztravelhouse

 

With this, let us consider the indication of two equal tax deductions for the same tax-paying individual. For example, let us assume that the individual makes the same two contributions of $300 and $400. Except in this scenario, gifts are given to two charities that are not certified as either QCOs or QFCOs by the state of Arizona. In this, these two tax-deductible gifts would reduce the individual’s taxable income by $700 ($300 + $400), from $30,000 to $29,300. After applying the 3% effective tax rate to the individual’s $29,300 of taxable income, the individual taxpayer’s liability would be $879, resulting in a higher payment to the state of Arizona.

 

That is one way of comparing tax credits and tax deductions. In the state of Arizona however, residents take advantage of this by also helping out their local charitable organizations or school tuition organizations.  Doing their part for the benefit of those in need, and helping themselves by being good citizens while getting Charitable Tax Credits and Tax Deductions in return. If you’re a resident of the state of Arizona, make sure you understand the difference between the two before deciding on donations to your preferred charitable organizations.