Lender FAQ: What is the difference between a tax credit and a tax deduction?
Lender FAQ: What is the difference between a tax credit and a tax deduction?
A tax credit provides a dollar for dollar reduction of your income tax liability. A tax deduction lowers your taxable income. For example, a $2,000 tax credit reduces your tax bill by $2,000. A $2,000 tax deduction reduces your taxable income by $2,000, but might only reduce your tax bill by $300 to $500, depending on what tax bracket you're in.
You can take a tax deduction for any additional interest paid above the value of the tax credit. For example, if you paid a total of $7,500 in mortgage interest in one year, you would be able to take an MCC tax credit of $1,500 (20% of the mortgage interest paid). You would also be able to take an itemized tax deduction for the remaining $6,000 in mortgage interest paid.
See how much you can save on taxes with an MCC tax credit using this Calculator.