There is a great misconception when it comes to tax deductions versus tax credits and I find this to be true whether one is dealing with a Canadian taxpayer or an American taxpayer. Every year, without fail, I will meet someone who expects to get money back because they donated for example or the person who thinks that his or her donations will reduce taxable income altogether.<\/p>\n\n\n\n
In general, a deduction is\nused to lower income before it is taxed (deductions are applied\nbefore arriving at taxable income). A credit is applied to the\ntaxable income. Often, a credit gets applied at the lowest tax rate.\nThe credit that gets applied at the highest tax rate regardless of\nincome is the donation. In Canada, donations worth more than $200.00\nwill earn a higher tax credit \u2013 generally the second highest tax\nbracket \u2013 unless you are in Trudeau\u2019s 33% bracket.<\/p>\n\n\n\n
Politicians of all stripes\nlike to excite Canadians by announcing the dollar value of the\nstarting point of a particular credit, not the real dollar value of\nthe credit. For example, I will use the \u201cHome Buyer\u2019s Amount\u201d\nthat was announced as $5000.00 for the purchase of your first home.\nThe way it truly works is $5000.00 x15% = $750.00 \u2013 please note\nthat 15% is the lowest federal tax bracket.<\/p>\n\n\n\n
If the Home Buyer\u2019s Amount\nwere a deduction instead of a credit (which it is not), an example\ncould be this. If you are in the 26% bracket federally than you would\nsave $5000x 26% = $1300 \u2013 please note that this would be the exact\nsame result if the credit percentage were tied to the taxpayer\u2019s\nbracket given in the example. In this case it would not matter if it\nwere a deduction or a credit. It is important to emphasize here,\nhowever that most credits are based on the Lowest <\/strong>tax\nbracket which is currently 15%.<\/p>\n\n\n\n When politicians talk, they\nlike to announce credits that they call often call tax breaks \u2013 but\nremember you have to spend the money first and than you get rebated a\npercentage back, as stated before, and this cannot be emphasized\nenough \u2013 at the lowest bracket, regardless of which bracket, you\nactually fall in, with a few exceptions. They have gotten away with\nthis for a very long time. They take advantage of the situation, and\nsadly the situation is that most people do not understand the\ndifference between a deduction and a credit, and they like it like\nthat.<\/p>\n\n\n\n To add to it all \u2013 most\ncredits are non-refundable which basically means that you do not get\na credit out of the tax system unless you actually put into the tax\nsystem. We do have a few refundable credits where one can get a\nrefund, even without putting into the system in the first place \u2013\nthese are few and far between such as the \u201cRefundable Medical\nSupplement\u201d. I will speak about these two types of credits in a\ndifferent post using the classic tale of a welfare recipient who\nbelieves that donations do more than provide a warm feeling that you\nare contributing to society \u2013 the recipient who thinks he gets\nmoney back as a result of the donations.<\/p>\n\n\n\n If you are in the lowest tax\nbracket, this does not make a difference to you, but, if you are in\nany other tax bracket it should.<\/p>\n<\/body>","protected":false},"excerpt":{"rendered":" There is a great misconception when it comes to tax deductions versus tax credits and I find this to be true whether one is dealing with a Canadian taxpayer or an American taxpayer. Every year, without fail, I will meet someone who expects to get money back because they donated for example or the person … Continue reading “Deductions and Credits: The Difference”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[5],"tags":[],"class_list":["post-102","post","type-post","status-publish","format-standard","hentry","category-tax-and-financial"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/taxpaws.com\/index.php\/wp-json\/wp\/v2\/posts\/102","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/taxpaws.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/taxpaws.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/taxpaws.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/taxpaws.com\/index.php\/wp-json\/wp\/v2\/comments?post=102"}],"version-history":[{"count":3,"href":"https:\/\/taxpaws.com\/index.php\/wp-json\/wp\/v2\/posts\/102\/revisions"}],"predecessor-version":[{"id":138,"href":"https:\/\/taxpaws.com\/index.php\/wp-json\/wp\/v2\/posts\/102\/revisions\/138"}],"wp:attachment":[{"href":"https:\/\/taxpaws.com\/index.php\/wp-json\/wp\/v2\/media?parent=102"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/taxpaws.com\/index.php\/wp-json\/wp\/v2\/categories?post=102"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/taxpaws.com\/index.php\/wp-json\/wp\/v2\/tags?post=102"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}