Guess what? It’s almost time to file your tax return. Both tax credits and tax deductions can save you money at tax filing time. If they both save you money, what’s the difference between a tax credit vs tax deduction? You may qualify depending on your net income, age, and tax filing status. Which kinds of tax breaks are available to you? Read on!
Tax credit vs tax deduction: how do they work?
Tax credits and tax deductions lower your taxes in different ways. It’s important to know the difference when you fill out your return. The more you understand, the more you can save.
A TAX CREDIT reduces your final tax bill.
A TAX DEDUCTION is an item or expense that you can claim. This reduces your total taxable income amount.
As a general rule of thumb, with a tax credit, you save money dollar for dollar. With a tax deduction, you save only a percentage of the expense you’re claiming.
How a tax credit works: Let’s say you owe $1,500 in taxes. With a $1000 tax credit, you’ll only owe $500. “Dollar for dollar” means exactly that. With a $1,500 tax credit, you pay $1,500 less in income tax.
How a tax deduction works: Let’s say you’re self-employed or run a small business. At tax filing time, you can deduct expenses related to your business. This reduces your taxable business income.
For example, if you make $60,000 a year and have $10,000 in write-offs, you will only be taxed on $50,000. You might even end up in a lower tax bracket. A lower bracket means you pay a lower tax rate.
What are some common tax credits?
Tax credits can reduce your taxable income. You just need to meet the eligibility criteria. Here’s a list of common tax credits available to Canadians. We’ve indicated the line where you’ll find it on your tax return:
Basic Personal Amount (Line 3000)
All taxpayers can claim a percentage of the Basic Personal Amount. For example, the maximum federal basic personal amount for 2022 is $14,398. Taxpayers can claim 15% of that amount ($2,159.70) as a tax credit.
Disability tax credit (Line 31600)
Home Buyer’s Amount (Line 31270)
First-time home buyers can claim the Home Buyers Amount and save up to $1,500 on their tax bill.
Lower-income Canadians automatically get the GST/HST credit. This helps offset the taxes they pay on products and services throughout the year. The government pays this four times per year.
Child care credits (Line 21400)
The various levels of government offer tax credits for parents of young children. One example is the Canada Child Benefit.
Refundable vs non-refundable
A tax credit can be refundable or non-refundable.
If your refundable credit is $1,500 but you only owe $1,400 in taxes, you get that extra $100 as a refund. If the tax credit is non-refundable, the extra $100 isn’t yours.
What are some common tax deductions?
Tax deductions help lower your taxable income. Canadians can save money with both provincial and federal tax deductions. Here are a few from the federal government:
RRSP (Line 20800)
RRSP deduction is available to all taxpayers under 71. You can contribute up to the maximum shown on your notice of assessment. You can carry forward your RRSP contribution and claim it in any future tax year.
Split pension deduction (Line 21000)
If your taxable pension income is high, “splitting” is a way to pay less tax. You can transfer up to 50% of your income amount to your spouse’s tax return. This lowers your taxable income amount. Common-law partners can also qualify for this deduction.
Annual union, professional, or like dues (Line 21200)
If you have paid annual union dues for your job, you can claim it. Enter the “other deductions” amount from your T4.
Child care expenses (Line 21400)
Did you pay for child care so that you or your spouse could work or study? You might qualify for a deduction. Check the eligibility criteria.
Disability supports deduction (Line 21500)
This is for people who have a mental or physical disability. If you qualify, you can claim expenses for personal attendant care and other expenses. You cannot carry forward this deduction.
Business investment loss (Line 21700)
You can claim a deduction if your business loses money.
Moving expenses (Line 21900)
Did you move because of work or school? You might be able to claim the moving expenses.
Interest Paid on your Student Loans (Line 31900)
Where’s the full list?
There’s a tax benefit for just about everyone. Take a look at the Government of Canada’s full list of tax credits and deductions. Also, check your province or territory for provincial/territorial tax breaks.
Tax credit vs tax deduction: which is better?
People generally prefer tax credits. They can be better than tax deductions because they directly reduce how much tax you owe.
Do you feel stressed at income tax time? Credits and deductions help ease the burden.
Just keep in mind…
- You must meet the eligibility criteria.
- You can’t claim a credit and a deduction for the same expense. For example, a student couldn’t claim the tuition and fees deduction and the Lifetime Learning Credit.
Get slammed with a huge tax bill and now struggling financially? We can help. Reach out today!