The Difference Between a Tax Deduction and a Tax Credit
Simply put, the difference is between lowering taxable income and lowering actual taxes. A tax deduction lowers your taxable income. For example, if your taxable income is $18,000 and you qualified for a $1,000 deduction. Your taxable income would be lowered to $17,000-that's the amount you would pay taxes on.
A tax credit, on the other hand, lowers the amount of the taxes you owe. For example, if you owe $1,000 in taxes and you qualify for a $1,000 tax credit, your taxes are wiped out and you owe nothing.
A tax credit is a dollar for dollar reduction of the amount of taxes you owe.
If you have a choice between a deduction and a credit, it is usually to your advantage to go for the credit. However, you should carefully evaluate the deductions and credits you qualify for and maximize both.
Some common tax deductions are the mortgage interest deduction and tuition and fees deduction. Some common tax credits are the earned income credit, the child tax credit, the Hope credit and the Lifetime Learning tax credit. Certain tax credits, such as the earned income credit and the child tax credit, are refundable-meaning, you can receive for the amounts of the credits even if you don't owe any taxes.
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