in this video I'm gonna explain the difference between the tax deduction and
a tax credit a lot of business owners asking this question all the time and
I'm gonna explain it here in this video if it's your first time here
my name is Navi Maraj I'm a CPA and I help small business owners and real
estate professionals save thousands of dollars in taxes but the reason for this
video is to explain the difference between tax credits and tax deductions I
get this question all the time but Before we jump into it I'm gonna have to
lay the foundation and provide some context to you so let's assume you're a
small business owner and your business had revenues of one hundred and thirty
thousand dollars and also you had expenses such as advertising or office
expenses utilities of thirty thousand dollars and so you're left with a net
profit of a hundred thousand dollars now what tax do you pay on that I've got a
whole separate video that it goes to the detail as to what taxes you will pay but
in summary you pay self-employment taxes of 15.3% and you also pay federal income
tax on that one so on the hundred thousand dollars of income the
self-employment tax you would pay in this scenario is fifteen thousand three
hundred dollars now for some of you accountants and CPAs out there I know
there's some tax strategies to reduce the self-employment tax but I'm just
trying to keep it simple in this video so again
fifteen thousand three hundred and self-employment tax you also play
federal income tax which is a little bit more technical than just to 15.3% times
this number right we have a tax bracket system here in the US so for this
hundred thousand dollars that gets divvied up within the different tax
brackets that we have so assuming you're a single the first nine thousand eight
hundred and seventy five dollars of the hundred thousand is gonna pay nine
hundred and eighty seven dollars in taxes the dollars afterwards nine
thousand eight hundred seventy six of the profit through forty thousand a
hundred and twenty five dollars of the profit is taxed at twelve percent and so
forth and so on now in this example the business earned a hundred thousand
dollars and so dollar number 85 thousand 526 through that hundred
thousand is getting taxed at 24% and this is excuse me in this example that's
three thousand four hundred and seventy four dollars so the total federal income
tax paid in this scenario is eighteen thousand seventy nine dollars I know
what you're thinking fifteen three plus eighteen thousand is a lot of money in
taxes right so you want to maximize your deduction so what is a deduction gonna
get you in terms of tax savings so in this example I'm saying you know what
would an additional $2,000 tax deduction save you in taxes and so the math works
like this two thousand dollars times fifteen point three percent because you
will save that amount in self-employment tax saves you three hundred and six
dollars in self-employment taxes and federal income tax that $2,000 deduction
comes out of this tax bracket it's the last two thousand dollars that you're
earned right and so the two thousand dollars times a twenty four percent
equals four hundred and eighty dollars so when you add these two together your
total tax savings of a two thousand dollar deduction is seven hundred and
eighty six dollars now I'm just keeping it simple here there are some
technicalities but in general that's what you're saving now
let's compare that to a two thousand dollar tax credit remember that this
person is paying eighteen thousand seventy nine dollars in federal income
tax a two thousand tax two thousand dollar tax credit is actually going to
take the two thousand dollars right from their tax liability so it reduces the
tax liability down to sixteen thousand seventy nine dollars so you can easily
see that a two thousand dollar deduction saves you $786 but a two thousand dollar
tax credits such as the child tax credit will save you two thousand dollars so
the difference there is roughly twelve hundred dollars in change
and so you can see that a credit is definitely more beneficial to you than a
deduction if you found this video insightful please do like it you can
leave me a comment and subscribe and I'll see in the next video
you