Tax credits and tax deductions can both lower your federal income tax, but they do not work the same way.

Full article: https://blog.taxact.com/credits-versus-deductions/

Here is the easiest way to remember the difference:

A tax deduction reduces your taxable income.

A tax credit reduces your tax bill.

Let’s compare the same $1,000 amount.

Suppose you are in the 22% marginal tax bracket.

A $1,000 tax deduction could reduce your federal income tax by about $220 because it lowers the income being taxed.

A $1,000 tax credit could reduce your federal income tax by up to $1,000 because it is applied directly against the tax you owe.

That is why a tax credit is often more valuable than a deduction of the same dollar amount. However, the actual benefit depends on the credit or deduction, your eligibility, your income, and your overall tax situation.

Can you claim both?

Potentially, yes.

Depending on your eligibility, you might:

• Take the standard deduction and claim the Child Tax Credit.
• Itemize mortgage interest and claim an education credit.
• Claim an adjustment for eligible student loan interest and qualify for another credit.

Each deduction and credit has separate rules, income limits, and documentation requirements.

Quick memory trick:

Deduction = reduces income being taxed.
Credit = reduces tax owed.

This article is for informational purposes only and not legal or financial advice.

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