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tax question (non-political)(7 posts)

tax question (non-political)mohair_chair
Jan 22, 2003 11:50 AM
I'm starting to do my taxes, and there seem to be a couple of places where you can take something as a deduction or a credit. (Sorry, can't think of one off the top of my head.) I know there are some finance people here who might have an answer.

I understand that a deduction reduces your taxable income and a credit reduces the amount of tax. My question is, is there an advantage to doing one over the other? I would think they would typically produce the same result, but that a deduction could drop you a bracket if you were borderline.
For a given amount, a credit is always better...PdxMark
Jan 22, 2003 12:27 PM
if your goal is to pay lower taxes.

A credit directly reduces the tax you pay by the amount of the credit. A deduction reduces your taxable income which, at a net 20% tax rate, means that your taxes are reduced by 20% of the deduction amount.

A change in tax brackets only affects the tax paid on the income above the tax bracket threshold. If you have a 10% bracket on the first $10,000, a 15% bracket on everything else, and $11,000 of taxable income, you pay $1000 tax on the first $10k income and $150 on the next $1000 income. If the %15 bracket applies to everything over $11k, you pay $1000 tax on the first $10k income and $100 one the next $1000 income.
best tip I can give youColnagoFE
Jan 22, 2003 1:28 PM
Unless you are single, own no property, have no investments, and only have one source of income where you get taxes witheld from, you are almost always gonna save $ (let alone many headaches) by having a qualified CPA do your taxes. My 2c anyway.
re: tax question (non-political)53T
Jan 22, 2003 1:52 PM
I've been doing my taxes for a long time. I've owned rental property, lived in two different states, had three employers in one year and taken early distributions from 401Ks as well as a lot of other complicated tax issues. Yet, I have never had an item where I was given a choice of a decuction or a credit. Therefore, the first thing you should check is if you are really reading the instructions correcly. It is likely that you do not have a choice. Also there are very few tax credits that apply to working people, you do work, right?
foreign taxes paidmohair_chair
Jan 22, 2003 2:06 PM
This is one of the items that can be either an itemized deduction or a tax credit. If you have any investments that deal in foreign entities, you will probably end up paying some foreign taxes. Look for it on your statements.
Good point53T
Jan 23, 2003 6:20 PM
A non-domestic mutual fund will usually pass onto you about $10 in foreign taxes paid.

Why would you take an deduction (worth ~$2.60) instead of a credit (worth 10.00)? If you owe no taxes? Then both options are worth 0.
Mortgage Credit Certificate (mcc)ALBikeGuy
Jan 23, 2003 6:51 AM
This is another way that you can apply a tax credit for something. In this, you can apply a portion of you interest paid (20% in my case) as a tax credit. Of course, this 20% cannot be used as a deduction.

I'm not sure if you can get a mcc anymore, but I'm sure if you have one, you'd know it!