Chapter 2: Deductions vs Creditshttps://www.lukeko.com/14/chapter-2-deductions-vs-credits 0
- Deductions reduce your taxable income
- Credits reduce your tax
- Adjustments to income
- Itemized deductions
Total Income - Adjustment to income deduction = Adjusted gross income - max(Standard deduction, itemized deductions) = Taxable Income
- Itemized deductions are only useful if it's larger than the standard deduction
- Examples of adjustments to income are contributions to a traditional IRA, contributions to a health savings account, interest on student loans.
- Examples of itemized deductions are charitable contributions, interest on a home mortgage, medical/dental expenses
Example: $2500 for qualified education expenses
It just means that the money is being used for something that is deductible - you get to spend the money before you pay taxes on it and makes it more cost effective. If something is deductible or "pre-tax" is it not free -- you're just getting a "discount"