And that s how it works. The percentage of income you pay increases with your income. Tax brackets govern the amount of tax you pay on each dollar of income. Lower long-term capital gain rates offer investors their single best opportunity to cut their tax. You'll also need to add in any extra taxes, such as self-employment tax, nanny tax, or alternative minimum tax.
Tax credits are like turbocharged tax deductions, only better.
Tax deductions cut your taxable income. Every dollar of deduction cuts your tax by whatever percentage of that deduction equals your tax bracket. Every dollar of credit cuts your tax by a full dollar. Tax deductions grow more valuable as your taxable income rises. But tax credits are more valuable for taxpayers in lower brackets.