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


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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