Tax Cut Vs. Tax Credit
"Tax cuts" and "tax credits" both refer to things that ease the burden on some or all taxpayers. The key difference is the point in the process where they apply.
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Tax Cut
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Technically, a tax cut is anything that reduces tax liability. In its most common usage, however, a tax cut refers to lowering the rate of taxation. Tax cuts are often dependent on your tax bracket.
Tax Cut Example
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A simple tax cut might involve lowering tax rates by 1 percentage point. For every $1,000 of taxable income, your tax liability would be reduced by $10. For 2011, the IRS reduced the amount of Social Security tax liability of employees and self-employed individuals by 2 percent. Employees only have 4.2 percent (instead of the standard 6.2 percent) deducted from their pay, and self-employed individuals only pay 10.4 percent, rather than the standard 12.4 percent.
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Tax Credit
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A tax credit is a direct reduction in the total amount you owe. In theory, your tax liability remains the same, but the credit qualifies as "payment" for a portion of the liability. Credits are often not dependent on your tax bracket.
Tax Credit Examples
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The federal Earned Income and Child and Dependent Care tax credits are typical examples of tax credits. First you compute your tax liability, then you subtract the credit directly from the amount of tax you owe.
Uses
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Tax cuts are considered more permanent; they involve changing the rate structure, which directly affects tax withholding. Tax credits help the government encourage or support certain kinds of economic or social behavior by "rewarding" qualifying taxpayers.
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References
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Comments
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schmammel
Dec 09, 2010
Excellent article on tax cut vs tax credit
