Most people focus on tax deductions when preparing their taxes. It is the most common of terms and understood by just about everyone. If you are new to the process, a tax deduction is simply an amount that you can subtract from your gross earnings. For instance, you might own a small business and drive a lot. The business mileage is deductible, so you should be able to claim a deduction for the mileage times the appropriate rate per mile allowed by the IRS. Once you claim all your deductions, your gross will be reduced to a number called a net profit for businesses or adjusted gross income for personal taxes.

Tax deductions are held up as the great tool for the masses. I scoff at tax deductions. They are helpful, but pale in comparison to the mighty tax credit. Let me make it clear. My tax credit will crush your tax deduction just about any day. Most people fail to look for tax credits when preparing their returns. Heck, many people don't even know what they are. Let's take a look.

A tax credit is a beautiful thing. Why? Well, it is not helpful like a tax deduction when it comes to reducing your gross. It is far more powerful. A tax credit is deducted from the tax you owe. Let that sink in for a minute. It is a dollar for dollar reduction of the amount you determine you have to pay the IRS after figuring out your net profit or adjusted gross income. Let's look at an example.

Assume I suddenly decide to adopt a child. The federal government thinks this is a noble goal and it is going to reward me. I am going to get a tax credit of roughly $10,000 or so. I go ahead and prepare my taxes for the year. After deducting everything legitimate, I end up with my adjusted gross income. I flip over to the tax tables and discover I owe $11,000 to the IRS. Yikes! Wait a minute. I get to deduct my $10,000 tax credit. Now I only $1,000! This is the value of the tax credit.

Tax credits are incredibly powerful ways to knock down your tax liability. Claim as many deductions as you can, but make absolutely sure to claim every tax credit possible.