Deductions and credits both reduce what you owe, but they work at different points in the calculation, and a credit is usually worth more than a deduction of the same size.
Tax deductions reduce taxable income
A deduction lowers the amount of income that gets taxed. Its value depends on your marginal rate. A $1,000 deduction saves $220 for someone whose top rate is 22%, and $120 for someone at 12%.
Most filers choose between the standard deduction (a flat amount set each year) and itemizing (adding up eligible expenses such as mortgage interest, state and local taxes up to a cap, and charitable gifts). You pick whichever is larger.
Tax credits reduce the tax itself
A credit comes off your tax bill dollar for dollar. A $1,000 credit saves $1,000 no matter which bracket you're in.
- Nonrefundable credits can reduce your tax to zero, but not below it.
- Refundable credits can produce a refund even if you owe no tax.
- Some credits are partly refundable.
Adjustments: the deductions you get either way
Some items, often called above-the-line deductions or adjustments, reduce income whether or not you itemize. Examples can include deductible traditional IRA contributions, HSA contributions and half of self-employment tax. Eligibility rules apply.
How to use this
- Keep receipts and records through the year, not just in April.
- Check whether itemizing beats the standard deduction before you spend time collecting every receipt.
- Look up the credits you may qualify for, such as those for children, education or retirement saving, on IRS.gov.
- Free filing options exist for many taxpayers; check IRS.gov for what's available to you.
Educational information only, not tax advice. Tax rules, brackets and contribution limits change every year, so confirm current figures at IRS.gov or with a qualified tax professional.