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.

Related Topics

Related Resources

Common Tax Questions Roundup

Here are the top tax questions our professionals got this year – with answers for you! How can you use this? Read on to get answers from H&R Block.

Filing for a Deceased Taxpayer

If you need help handling an estate, we're here to help. Learn how to file taxes for a deceased loved one with H&R Block.

Student Loan Interest Deduction

Learn how to deduct student loan interest with H&R Block. Get information about qualified education expenses and see if a student loan tax deduction applies to you.

What Is a CPA or Certified Public Accountant?

What is a CPA, and how can one help you with preparing your taxes? Understand the role of a certified public accountant with the experts at H&R Block.