Tax Credit and Tax Deduction
November 5th, 2009 Posted in TaxesWhat Is The Difference Between A Tax Credit and A Tax Deduction?
| Tax Deduction | Tax Credit (Non-Refundable) |
| A tax deduction is an amount of money which lowers your taxable income. | A tax credit is a dollar for dollar deduction which is subtracted from the amount of tax you pay. |
| Tax deductions reduce taxable income. | Tax credits lower taxes payable at the lowest tax rate |
| Tax deductions may make your taxable income zero by exceeding your employment income. | Tax credits may not make your taxable income zero because it only reduces taxes payable at the lowest tax rate. |
| Tax deductions reduce more taxes for those who are in higher tax brackets than for lower tax brackets. | Tax credits are fixed amounts, so they reduce same monetary value to all taxpayers – if you have enough taxable income to make the deduction. |
| If you live in Ontario and in the highest federal tax bracket (29%), your federal and provincial combined marginal tax rate is 46.41% – as of 2009. If you have $100 tax deduction = you will save $46.41 in tax. If you are in a lower bracket, you will receive less savings. | Tax credits are calculated based on the lowest federal and provincial tax rates. For 2009, lowest federal and provincial rates are 15% and 6.05% (Ontario). Therefore, if you have $100 tax credit, you will save $15 + $6.05 = Total $21.05 – regardless of tax bracket. |
| Tax deduction examples: RRSPs, Childcare expenses, Capital losses, Moving expenses. | Tax credit examples: Medical expenses, Eligible dependent, public transit credit, Caregiver amount, Tuition and education amount, Charitable donations. |
Tax Deduction or Tax Credit – which one is better? The answer can be a tricky one and it may not as simple as it looks. In general, tax deduction seems to favour the higher income group, but I would suggest you to consult a tax professional. For more Info,
please visit – Canada Revenue Website.
2 Responses to “Tax Credit and Tax Deduction”
By Bill on Nov 12, 2009
So if I do not owe any taxes I will not have a benefit using a tax credit?
By A.D. on Nov 12, 2009
Bill – my best advice, please consult a tax professional about your situation. In general, In Canada, there are two types of tax credits – Refundable and Non-Refundable tax credits. Tax credit I discussed above is Non-refundable tax credits. Refundable tax credits may give you a refund even if you don’t owe any taxes.