Tax Cuts, Tax Breaks, Tax Credits?
Can you please explain the differences between these terms? Are they all the same thing, just different words? Or, are there specifc purposes for each term?
How would I benefit from them?
- 1 decade agoFavorite Answer
"Tax Cuts" and "Tax Breaks" appear to be synonyms almost, while "Tax Credits" and "Tax Deductions," the latter of which you did not mention, are different.
A "tax cut," in this context, seems to be best understood as a reduction in a tax rate, current or proposed.
A "tax break" is an ambiguous term to refer to anything that may be advantageous in the objective of reducing a tax liability, etc.
A "tax credit" is a statutory item that reduces a tax liability, or increases a refundable tax overpayment, dollar for dollar (or a statutory percentage thereof).
A "tax deduction" is a statutory item that reduces one's taxable income. The value of that tax deduction is the amount of the item multiplied by one's tax rate.
In the short-run, you would benefit from each of them by keeping more money in your own savings or investment account.
Phillip S Foster CPA
Dave Ramsey Endorsed Local Provider
- travelguruetteLv 61 decade ago
Tax deductions are what lower your taxable income. You can take the standard deduction or itemize deductions. Student loan interest or the dependent care credit are examples. A tax credit lowers your actual taxes. Earned income credit and the additional child tax credit is an example of those. Add up all your income then subtract the deductions. This equals your agi or adjusted gross income. The first page of the 1040 and the schedule A(you can get online) is all about deductions. Once you have a final number for income you figure how much tax you owe. Lets say you have 5000 in taxable income. Your tax rate is 10% so you owe 500 in taxes. Now you apply any tax credits. The second page is about credits. You try to have enough credits to bring your taxes to 0. There are some refundable credits. These are good. If you reduce your taxes to 0 and you have a refundable credit (earned income credit) then you can get a check for what is left over. Most credits reduce your taxes to 0 and it ends there.
When we talk about tax cuts and tax breaks I think it is general discussion about what the legislature is doing. A tax deduction or credit is a tax break. Tax cuts would be changing a law so people pay less taxes.