What is the difference between a Tax Credit and a Tax Deduction?

Other than the fact that they appear on different parts of your tax return there are a few very important differences between tax credits and tax deductions.

Tax deductions work by reducing your net income, and thus the taxes you pay.  The benefit you receive is dependant on your marginal tax rate.

Tax credits are available to reduce the taxes you would otherwise have to pay.  The rate is equal to the lowest marginal tax bracket and therefore the savings are the same for all taxpayers.

Tax credits give everybody the same break.  Tax deductions give taxpayers a bigger break if in a higher marginal tax bracket.

Personal tax deductions include, but are not limited to, child care expenses, RRSP & pension plan contributions, moving expenses, union dues, spousal support payments, certain employment expenses, carrying charges & interest expenses.

Tax credits include personal amounts available to everyone, as well as more specific credits depending on your circumstances.  They are listed on Schedule 1 of the personal tax package.  Check them over to see if you can qualify for any of them.

Prudent taxpayers should take advantage of all the tax credits available to them.  Tax deductions should be given more thought and planning so as to reduce your overall taxable income.  When in a higher marginal tax bracket greater examination of all possible tax deductions should be considered.  Read our blogs and determine if any tax reduction opportunities are available for you to utilize and if so incorporate them into financial and life goals.