Both the concepts of tax reduction and tax credit benefits an individual in a way that the taxes will have a less significant impact on the reduction of the financial resources. Tax reduction directly decreases the amount of tax included in some forms of expenses, while the tax credit decreases the expenses on taxes by accessing credit values which can be obtained by meeting specific requirements, and will take care of some portion of the taxes (Mercadante, n.d). Both are helpful to the taxpayers, but which one is more beneficial?
Considering another concept called the Adjusted Gross Income, or AGI, the significance of tax reduction and tax credits can be differentiated from one another. Moreover, the concept is directly related to two other important concepts which determine the amount of tax deductions, the above-the-line and below-the-line deduction. The AGI depends on the above-the-line deductions because the latter is deducted to the total tax returns in order to determine AGI. Meanwhile, below-the-line deductions are benefits determined depending on the amount of AGI. The lower the AGI, the higher the chance of below-the-line deductions (Marz, n.d).
On the other hand, the tax credit is highly related to the concept of marginal interest rate. Simply speaking, marginal interest rate is the amount of tax is determined and adjustable depending on the earnings. That is, a certain percentage rate is applied to determine the amount of tax (CNBC, 2012).
Seeing the difference between the concepts of tax deduction and tax credit, it can be said that the tax credit does not have a greater utility than tax reductions. As we can see, the increase in the number of taxable commodities will greatly affect the finances because these taxes differ from one another depending on the commodities. In the long run, tax deductions will take over these taxes because several benefits will be gained from multiple taxes. Meanwhile, the tax credit depends mainly on the status of an individual. Given multiple taxable commodities, the tax amount will just pile up and tax credits will not be able to adjust, especially if the expenses significantly increase. Therefore, the utility is not solely greater on tax credits. Depending on circumstances, either benefits will be more significant compared to the other.
References
CNBC. (2012). What is the Marginal Tax Rate? CNBC, LLC. Retrieved 18 July, 2016, from http://www.cnbc.com/id/49521672
Marz, M. (n.d). Difference Between Above the Line & Below the Line Deductions. Hearst Newspapers, LLC. Retrieved 18 July, 2016, from http://smallbusiness.chron.com/difference-between-above-line-below-line-deductions- 64765.html
Mercandante, K. (n.d). What is a Tax Credit vs Tax Deduction – Do You Know the Difference? SparkCharge Media, LLC. Retrieved 18 July, 2016, from http://www.moneycrashers.com/what-is-tax-credit-tax-deduction/
