"Tax deductions" and "tax credits" sound similar but work completely differently. Understanding this can save you thousands.
The Core Difference
| [[tax deduction]] | [[tax credit]] | |
|---|---|---|
| What it reduces | Your taxable income | Your actual tax bill |
| Example | $1,000 deduction | $1,000 credit |
| Value (22% bracket) | Saves ~$220 | Saves $1,000 |
Pro Tip
Tax credits are always more valuable than deductions of the same amount. A $1,000 credit beats a $1,000 deduction every time.
How Deductions Work
A deduction reduces your TAXABLE INCOME.
Example:
- Taxable income: $50,000
- You have $2,000 in deductions
- New taxable income: $48,000
- Tax savings: $2,000 × your tax rate (22%) = $440
The value depends on your . Higher bracket = more valuable.
How Credits Work
A credit reduces your ACTUAL TAX.
Example:
- Your calculated tax: $6,000
- You have a $1,000 tax credit
- New tax owed: $5,000
- Tax savings: $1,000 (dollar-for-dollar)
Credits are worth the same regardless of your tax bracket.
Common Tax Deductions
| Deduction | Who Qualifies | Typical Value |
|---|---|---|
| Everyone | $14,600 (single) | |
| interest | Homeowners | Varies |
| State/local taxes | Itemizers | Up to $10,000 |
| Charitable donations | Itemizers | What you gave |
| Student loan interest | Up to $80k income | Up to $2,500 |
| 401k contributions | Anyone with 401k | What you contributed |
| contributions | HSA holders | Up to $4,150 |
Common Tax Credits
| Credit | Who Qualifies | Max Value |
|---|---|---|
| Earned Income Credit | Low-to-moderate income | Up to $7,430 |
| Child Tax Credit | Parents | $2,000/child |
| Child Care Credit | Parents paying for care | Up to $2,100 |
| Saver's Credit | Low-income retirement savers | Up to $1,000 |
| Education Credits | Students/parents | Up to $2,500 |
| EV Tax Credit | Electric car buyers | Up to $7,500 |
Watch Out
Some credits are "refundable" (you get money even if you owe no tax) and some are "non-refundable" (can only reduce tax to $0). Check which type you're claiming.
Strategy: Maximize Both
Do This
- Take all deductions you qualify for (or standard deduction if higher)
- Claim every credit available (dollar-for-dollar savings)
- Prioritize credits over deductions when you have choices
- Time deductions strategically (bunch in years you'll itemize)
Example: The Full Picture
Sarah's Situation:
- Income: $60,000
- Standard deduction: $14,600
- Taxable income: $45,400
- Tax before credits: $5,200
- Child Tax Credit: $2,000
- Final tax owed: $3,200
The deduction saved her ~$3,200 in taxes (reducing what's taxed). The credit saved her exactly $2,000 (reducing the tax itself).
Quick Win
Before filing, review the IRS list of tax credits. Many people miss credits they qualify for—especially education credits, retirement saver's credit, and the Earned Income Credit.