Question

I’m unsure about tax deduction vs tax credit. What’s the difference between deduction and credit?

Answer

Regarding tax deduction vs tax credit, the essential difference between deduction and credit is that a credit directly decreases the amount of tax you owe while a deduction lowers your overall amount of taxable income.

Because a deduction lowers your taxable income, it lowers the amount of tax you owe, but by decreasing your tax bracket — not by directly lowering your tax.

Ex: If you’re in the 25% bracket, a $1,000 deduction lowers your taxes by $250. A $1,000 credit lowers the bill by the full $1,000.

A credit can be nonrefundable or refundable. A nonrefundable credit lets you reduce your tax liability to 0. A refundable credit can also reduce your liability to 0. If there’s any amount left over from your refundable credit, you get the balance of the credit back.

A deduction can only lower your taxable income. You can’t get money back from a deduction.

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