Tax Credit vs. Tax Deduction
by Kevin Silver
They say each and every season has its own unique beauty, but it’s hard to say the same for the tax season.
But let’s try to adopt a positive attitude, and look for that tiny speckle of light in the distance. For just as the government taketh, the government also giveth back!
You’ll find that the CRA provides tax aid in two very different ways: through tax deductions, and tax credits. Honestly, we wouldn’t be surprised if you never thought about what separates the two - they sound like the exact same thing! But rest assured, the truth can't be any further than that...
1. Tax Credit
Tax credits are fairly easy to understand by definition. Simply put, think of them as dollar-for-dollar reduction of the income tax that you owe.
However, don’t assume they’re easy pickings; tax credits usually come with a pretty chunky block of fine print.
The Children’s Fitness Tax Credit, for example, allows you to claim ELIGIBLE fees paid in the year up to a maximum of $500 per child - the key word here being, “eligible.” Unfortunately, an extra step is needed to figure out the ACTUAL tax credit amount that you’re going to be handed.
The actual tax savings is calculated by multiplying the eligible amount by the lowest personal income tax rate (15%) by the eligible fees for each child. So in the end, if you’re eligible for $500 tax credit, you’ll be receiving a measly sum of $75 after the calculations are taken care of.
Non-refundable vs. Refundable Tax Credit
Tax credits are also either:
- Non-Refundable
If you had an actual tax credit of $1,000, but owed only $500 in taxes, your tax bill will be reduced to $0.
… Yep. That’s it. You won’t be getting the remainder, if that’s what you’re wondering.
- Refundable
On the other hand, if the tax credit IS refundable…
Then scratch what we said above. You’d get the remaining $500 delivered straight into your wallet!
2. Tax Deduction
Tax deductions, on the other hand, don’t reduce your tax amounts directly. Instead, they reduce the amount of income that is subject to income tax!
Unfortunately, figuring out how deductions work requires a bit of math. But fear not! We’ll provide you with an example to set things straight. Mind you, each province and territory has their own tax rates, so we’re only going to be looking at the federal portion of income tax to make things a bit more bearable.
Anyways, first thing’s first – in order to figure out how tax deductions work, you have to know where you are in the tax bracket:
Federal Tax Rates for 2019:
- 15% on the first $47,630 of taxable income, plus
- 20.5% on the next $47,629 of taxable income (on the portion of taxable income over
- 47,630 up to $95,259), plus
- 26% on the next $52,408 of taxable income (on the portion of taxable income over $95,259 up to $147,667), plus
- 29% on the next $62,704 of taxable income (on the portion of taxable income over 147,667 up to $210,371), plus
- 33% of taxable income over $210,371
If you earned exactly $47,630, which is the cut-off for the 15% tax bracket, you’d be subject to $7,145 in federal income tax. But if you were to be earning $90,000, that would put you into the 20.5% income tax bracket.
Fear not, though – the first $47,916 will still be subject to the tax at the 15% rate, and the remaining that goes over that amount will be subject to the higher rate.
Following this formula, if you earned exactly $100,000 a year, you’d owe the CRA approximately $20,761!
A tax reduction of $10,000 would reduce your taxable income from $100,000 to $90,000. Now, you’d owe the government $15,831, as opposed to $20,761 before the deduction!
To sum it up, a $10,000 tax deduction for a tax-payer with an income of $100,000 would translate to approximately $4,930 in savings.
The Showdown: Tax Credit vs. Tax Deduction
So which one is better? Well, that depends on the state of your income.
In a situation where your income IS at a whopping figure of a $100,000, a $10,000 tax credit will only save you $1,500, while a tax deduction will save you $4,930.
But if your income is, say, $45,000, you can consider tax credit and deduction to be of equal value. That’s the catch, really – a tax deduction becomes more valuable the higher you are from the lowest tax bracket!
There’s quite a number of tax breaks the CRA has for us tax-payers to claim. But they don’t make it easy; you’ll have to spend your fair share of sleepless nights to even begin tackling the lingo known as tax laws. But don’t worry – with a bit of diligence and research, you'll definitely be reaping the benefits you need and deserve this tax season!
If you’re finding yourself struggling to pay back your tax debts, Magical Credit offers short-term loans to help make ends meet. Our loans, ranging from $500 to $20,000, can help get your immediate debts paid and keep your head above your bills!
Apply for a loan today by submitting our online application, or contact us at 1-877-213-2088.
