Using the same numbers as above, applying a $10,000 tax credit to a $26,400 tax bill would reduce your total tax bill to $16,400 ($26,400-$10,000). Write-offs become increasingly more valuable as your income increases because when you fall into a higher tax bracket, you save more on taxes for every dollar spent.Ī tax credit, however, directly reduces your tax bill, dollar for dollar. (In real life, calculating your tax bill is a little more complicated because the tax brackets are progressive, but this simple illustration shows how tax write-offs can reduce your tax bill.) You then pay tax on that income based on what tax bracket you fall into.įor example, if your annual gross income is $110,000 and your tax deductions are $10,000, your taxable income is $100,000.
A tax write-off reduces your taxable income. A tax write-off is often confused with a tax credit but it’s not the same thing.
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