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Taxes

Tax reduction, tax credit, tax deduction, what's the difference?

Do you know that there are several ways to reduce your tax bill?

Examples include a tax reduction for donations to an association, a tax credit for homework, or a tax deduction for child support payments. 

In concrete terms, what are the differences between these three tax advantages?

Don't panic, we'll explain!

First, what is a tax deduction?

It's a withdrawal from your taxable income.

Let's take an example. You have an income of €10,000 and a tax deduction of €1,000. You will only be taxed on €9,000.

The deduction can be made on your total income.

For example, the deduction of support payments you make to an adult child.

The deduction can also be made on a class of income.

For example, your business expenses are deducted from your salaries.

The tax deduction should not be confused with the tax reduction.

The tax reduction is an amount deducted from your tax.

For example, you made a donation to an association that entitles you to a tax reduction of €700. If your tax is €1,500, then you will only pay €800.

But if you're tax-free, you can't take advantage of it.

And if you’re low-taxed, you get only a portion of the rebate.

For example, if you are entitled to a tax reduction of €700, but you owe €500 in taxes, the €200 surplus is “lost.”

What is a tax credit?

It's also deducted from your tax.

If the amount of the tax credit exceeds the amount of your tax, the surplus is refunded to you.

However, if you do not pay tax, the tax services will refund the amount of your tax credit.

For example, suppose you are entitled to a tax credit of €700 for your child care expenses. If you owe €500 in taxes, the tax services will refund the €200 surplus.

Only one exception, sums less than €8 are not refunded.

In summary

+ A tax deduction is an amount withdrawn from your taxable income.

+ A tax reduction is an amount deducted from your taxes (if you pay taxes).

+ A tax credit is also deducted from your tax, or refunded if it exceeds your tax (or you don’t pay any).