This Tax Confusion Could Be Costing You Money — a CFP Explains How To Fix It

Core Insights - Understanding the difference between tax deductions and tax credits is crucial for effective tax planning, as it can significantly impact financial outcomes [2][3]. Tax Deductions vs. Tax Credits - A tax deduction reduces taxable income, while a tax credit reduces tax liability dollar for dollar, making credits generally more powerful [3]. - For example, a $10,000 deduction in a 37% tax bracket saves $3,700, whereas a $10,000 tax credit reduces the tax owed by the full $10,000 [3]. Practical Applications - Knowledge of tax terms enables better financial planning and tax preparation, allowing individuals to maximize their benefits [4]. - Common deductions include mortgage interest, charitable contributions, and state and local taxes, which lower the income subject to tax [5]. - Identifying applicable tax credits, such as those for energy efficiency improvements, can further enhance tax savings [6].