What Is The Difference Between A Tax Credit And A Tax Deduction?

As we draw nearer to doing our taxes for 2010, it is important for us to understand the difference between a tax deduction and a tax credit.

A tax deduction reduces your taxable income, and the actual amount of taxes you save depends upon your personal tax rate.   If you are in a high tax bracket, a tax deduction can provide you with substantial tax savings, but if you are in a low tax bracket the savings will be lower.  If you have no taxable income, a tax deduction does not benefit you at all.

By contrast, a tax credit is a deduction from tax owing, so if the credit can be used it will provide the same tax benefit for everyone regardless of what tax bracket they are in.

There are many types of tax deductions and tax credits and you want to ensure that you are taking advantage of all the ones that you are eligible for.  For more information on all the possible tax credits and tax deductions, check out the Canada Revenue Agency website, talk to your accountant, or borrow an up- to -date tax book from your local library.