What is the difference between a tax deduction and a tax credit?
A tax credit and a tax deduction both work to reduce the total amount of tax you pay.
Deductions reduce the amount of your income that is taxable. For example, the renter’s deduction in Indiana reduces the taxable income of a person who pays rent for his home by a maximum of $3,000. The renter would subtract the amount he paid for rent, or $3,000 (whichever is less) from his income. For more information on the renter’s deduction, visit Information Bulletin 38.
Once you have determined the taxable income you received for the year, you may be able to apply tax credits. Tax credits reduce the amount of the tax you must pay. For example, if you made a charitable contribution to an Indiana college or university (tuition is not a charitable contribution), you can subtract one-half of the contribution, or $100 (whichever is less) from the amount of the Indiana adjusted gross income tax that you owe for the year. For more information on the Indiana College Credit, visit Schedule CC-40.