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Health & Fitness

Deduction vs. Exemption vs. Tax Credit

Have you ever wondered what the difference is between a deduction, and exemption and a tax credit?  Parrott & Associates CPAs explains:

Deductions

Deductions are good for the taxpayer.  A deduction is an expense the individual has paid that reduces an individual’s income tax liability by reducing taxable income.  Therefore, a limit on deductions is bad for the taxpayer.  Deductions cannot reduce taxable income below zero.

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Deductions vary among taxpayers because expenses vary among taxpayers.  However, the tax code allows something called a Standard Deduction that is not based on expenses the individual has actually paid, but is rather an arbitrary number that is increased each year for inflation.  In 2011, the Standard Deduction was $11,600 for a married couple filing jointly.  A married couple who had certain expenses (such as mortgage interest, property taxes, and charitable contributions) that exceed the Standard Deduction amount, could claim Itemized Deductions in lieu of the Standard Deduction.

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