What is the difference and how they work to reduce your household taxes!
Many people use the phrases tax deductions and tax credits interchangeably, but they are 2 different things and affect how your taxes are calculated in different ways.
A tax deduction lowers the amount of income that income tax payable is calculated on. For example if your T4 says you earned $100,000 and you put $10,000 into your RRSP, your income tax payable is only calculated on $90,000 of income not the 100,000.
Now Tax Credits come in 2 forms, non-refundable and refundable.
Refundable tax credits like the climate action incentive are treated the same way as the income tax withheld off of your paychecks or income tax installment that you have made if you are self employed. These non refundable tax credits get applied to your total taxes payable and if there are any dollars left over you get them back as cash in your pocket.
Non-refundable tax credits like the basic personal amount, the amount that you pay off your paychecks for CPP and EI, and medical expenses to name a few get added together and a complex calculation determines how much your total taxes payable is reduced by.
The basic personal amount here in AB will lower your total taxes payable by up to $4000 whether you earn 30,000 or 300,000. Some tax deductions and tax credits can be flipped or switched between household member tax returns. This is why it is beneficial to prepare the tax returns for your entire household/family together and not separately to minimize the household's overall tax bill.
It also helps to have an overall tax plan to ensure that your household/family is getting the maximum of all the tax deductions, credits & benefits available to them. A little bit of time invested by a tax accountant reviewing your tax situation can pay off substantially & help you organize other aspects of your financial affairs.
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