Tax deductions and tax credits both lower what you owe — but they work in different ways, and the difference is worth understanding.
A tax deduction reduces your taxable income. It lowers the amount of income the IRS applies tax to. Its value depends on your tax bracket: a $1,000 deduction saves you $1,000 multiplied by your tax rate. In a 22% bracket, that is about $220.
A tax credit reduces your tax bill directly, dollar for dollar. A $1,000 tax credit lowers what you owe by a full $1,000, regardless of your bracket. That generally makes a credit more valuable than a deduction of the same amount.
Two kinds of credits:
- Nonrefundable — can reduce your tax bill to zero, but no further.
- Refundable — if the credit is larger than your tax bill, you can receive the difference as a refund.
About deductions: when you file, you choose either the standard deduction (a flat amount) or itemized deductions (adding up specific eligible expenses) — whichever lowers your taxable income more.
Tax rules change year to year and depend on your situation. For guidance specific to you, RMO Tax Services can help. This article is general information, not tax advice.