Tax Credit vs. Tax Deduction

What’s the difference?

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Both tax credits and tax deductions can reduce the amount of tax you must pay.⁣⁣

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Deductions reduce the amount of income you pay taxes on, which in turn can reduce your tax.⁣⁣

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Credits are a dollar-for-dollar reduction in the amount of tax you owe.⁣⁣

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If you had an income of $30,000 and took a $1,000 deduction, you don’t have to pay tax on that $1,000 of income. The deduction could save you $200 (assuming a 20% tax rate on that $1,000).⁣⁣

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On the other hand, a $1,000 credit would reduce the tax you owe by that $1,000. So if you owed $3,000 in taxes, you’d now owe $2,000 and save $1,000.⁣⁣

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Many people refer to deductions as “write-offs” or they use all these terms interchangeably. Understand they all impact you differently. ⁣⁣