Deduction: income; credit: tax
Different places in the calculation.
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Taxes0/10
Marginal tax brackets, demystifiedTax credits versus tax deductionsStandard deduction or itemising?Sales tax, explained (and why your receipt total surprises you)Which receipts actually matter at tax timeShort-term and long-term capital gainsTax-loss harvesting, carefullyW-2 employee versus 1099 contractorCharitable giving and taxesWhen to hire a tax professional
Tax credits versus tax deductions
A deduction lowers taxable income; a credit lowers the tax itself. Dollar for dollar, a credit is usually worth more.
In this lesson you will
- Explain how deductions and credits differ
- Value a deduction at your marginal rate
- Tell refundable from non-refundable credits
Deductions and credits both reduce tax, but in different places.
Deductions
A deduction reduces taxable income. Its value depends on your marginal rate: a $1,000 deduction in the 22% bracket saves about $220.
Credits
A credit reduces the tax bill directly, dollar for dollar. A $1,000 credit saves $1,000 of tax.
Refundable and non-refundable
- Non-refundable credits can reduce tax to zero but no further.
- Refundable credits can produce a refund even if you owe no tax.
- Some credits are partly refundable.
Do not miss them
Credits exist for things such as children, education and certain energy improvements, with eligibility rules that change. The IRS website lists current credits; free help is available through the IRS Volunteer Income Tax Assistance (VITA) program for eligible filers. Not tax advice — rules and amounts change; check IRS.gov or a tax professional.
By the GetGuac team · Editorial policy
Three ideas to keep
Credits are dollar for dollar
Usually worth more.
Refundable credits can pay you
Even with no tax owed.
Do it in 4 steps
Find your marginal rate
To value deductions.
List credits you may qualify for
On IRS.gov.
Check refundability
For each credit.
Use free help if eligible
VITA.
$1,000 deduction versus $1,000 credit
Illustrative 22% marginal rate.
| Item | Reduces | Tax saved |
|---|---|---|
| $1,000 deduction | Taxable income by $1,000 | $220 |
| $1,000 credit | Tax owed by $1,000 | $1,000 |
Same headline number, very different value.
Where this usually goes wrong
- Treating deductions and credits as equal
- Missing refundable credits by not filing
- Ignoring eligibility rules
List one credit you might qualify for and check its current rules on IRS.gov.
Tools and guides for this lesson
Quick quiz
1. A tax credit reduces…
2. A $2,000 deduction at a 12% marginal rate saves about…
3. A refundable credit…
0 of 3 answered
Puzzle
You owe $800 before credits and have a $1,200 refundable credit. What is the result?
Show the answer
A $400 refund
$800 − $1,200 = −$400, refunded because the credit is refundable (subject to its rules).