Understanding the Difference Between Tax Credits and Tax Deductions

Tax Credits vs. Tax Deductions

Both credits and deductions reduce your tax bill, but understanding the difference is key to maximizing your savings.

Tax Deductions

Deductions reduce your taxable income. If you're in the 22% tax bracket and claim a $1,000 deduction, you save $220 in taxes.

Common deductions include:

• Mortgage interest
• Student loan interest
• Charitable contributions
• Business expenses

Tax Credits

Credits reduce your actual tax bill dollar for dollar. A $1,000 credit saves you exactly $1,000 in taxes.

Valuable credits include:

• Child Tax Credit: Up to $2,000 per qualifying child
• Earned Income Tax Credit (EITC): For low-to-moderate income workers
• American Opportunity Credit: Up to $2,500 for college expenses
• Lifetime Learning Credit: Up to $2,000 for education expenses
• Child and Dependent Care Credit: For daycare and childcare expenses

Refundable vs. Non-Refundable Credits

• Refundable: Can reduce your tax below zero, resulting in a refund
• Non-refundable: Can only reduce your tax to zero

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Not sure which credits you qualify for? Our team can help identify every credit available to you.