Tax Credit vs. Tax Deduction

A deduction reduces your taxable income. A credit reduces your actual tax bill. Credits are more valuable dollar-for-dollar.

Full explanation

A tax deduction reduces your taxable income — if you're in the 22% bracket, a $1,000 deduction saves you $220. A tax credit directly reduces your tax bill — a $1,000 credit saves you $1,000 regardless of your bracket. Credits are further divided into nonrefundable (can reduce tax to $0 but not below) and refundable (can result in a refund even if you owe no tax). The Child Tax Credit and EITC are partially or fully refundable. The Lifetime Learning Credit is nonrefundable.

Source: IRS Publication 17 — Credits

Ask the AI about this

“How does tax credit vs. tax deductionaffect my taxes?”

Tax education only. Source: IRS Publication 17 — Credits.