The Difference Between Tax Write-Offs & Tax Credits

06/06/24

It is important to note that there is a big difference between a tax write-off and a tax credit. Though they are both useful tools, they are not interchangeable terms.

A tax write-off is an amount you can deduct from your taxable income. For example, 401(k) contributions are tax deductible. If you earn $50,000 and contribute $5,000 to your 401(k), you can write-off $5,000, and the IRS will not tax you on that $5,000. You’ll now only be taxed on $45,000 of your income! This does NOT mean, however, that you will receive $5,000 back at the end of the year.

A tax credit is a dollar amount you receive back on your tax return. For example, the Child Tax Credit provides up to $2,000 per child to parents who meet certain eligibility requirements. This means if you meet these requirements and have 3 children, you will receive $6,000 back on your tax return. Unlike a tax write-off, you actually receive this dollar amount in the form of a tax credit.

Please note that the examples used above are not the only tax write-off and tax credit. Using every available write-off and credit to your advantage will decrease your tax liability and help your financial present and future.

* Please talk with me about your specific situation. I never charge for meetings or advice; I only get paid directly from accounts that I manage.