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What’s The Difference Between Tax Credits And Deductions?

This time of year, many schools and non-profit groups are asking for cash donations, and they’re promoting how those donations can lower the amount of taxes people pay. So, what's the difference between tax credits and deductions?

The key difference is that deductions lower your tax liability based on a percentage, while credits lower your tax liability dollar for dollar. 

Let’s say you donate $100 to an eligible non-profit. That donation can lower your tax liability, based on your tax bracket. For example, if you’re in the 25 percent bracket, that $100 donation will reduce your tax liability by $25. 

"Now a credit on the other hand will go dollar for dollar against assessed tax,” IRS spokesman Bill Brunson said.

That means a $100 donation to a qualifying group would cut your tax liability by $100. The Arizona Department of Revenue has a list of tax creditsthat include charities, schools, renewable energy, university research and development, health insurance and small-business capital investment.

Only taxpayers who itemize can claim deductions for charitable contributions. For deductions to count toward 2016 tax liability, donations must be made by Dec. 31.

EDITOR'S NOTE: This story has been corrected to reflect that deductions and credits reduce tax liability.

News Business
As a senior field correspondent, Christina Estes focuses on stories that impact our economy, your wallet and public policy.