A tax credit provides a dollar-for-dollar reduction in tax liability, not just a reduction in taxable income. A $1 tax credit results in a $1 reduction in tax liability.
The value of a tax deduction is equal only to the taxpayer’s bracket. For example, a $1 tax deduction for a taxpayer in a 21% tax bracket will reduce tax liability by $0.21.
Tax credit developments are typically structured to maximize tax credit delivery to the investor partner, whose equity investment will be largely determined by the quantity of tax credits. Click here to learn more about how to calculate the LIHTC.
A comparison that illustrates the differences between a tax credit and a tax deduction is provided below:
Affordable housing becomes easier to understand once you have learned its lexicon. For a guide to common industry terminology, click here for our Affordable Housing – LIHTC glossary.
Westmont and our partners at TheoPRO can serve your needs throughout the United States. Please do not hesitate to contact us for more information about our consulting and advisory services for real estate acquisition, asset management and tax credits, including the Low Income Housing Tax Credit (LIHTC) and Historic Tax Credit (HTC), as well as other real estate matters. Click here to learn more about our team.
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Image of calculator courtesy of Phillip Ingraham. Licensed under Creative Commons.