Deductions vs. Credits – Know the Difference

When it comes to filing your taxes, two common terms often cause confusion: deductions and credits. Both can reduce the amount you owe, but they work in very different ways. Understanding the difference can help you maximize your tax savings.

What Are Deductions?

A deduction lowers your taxable income. That means the IRS taxes you on a smaller portion of your income.

For example:

• If you earn $80,000 and claim a $5,000 deduction, your taxable income becomes $75,000.

• The actual tax savings depend on your tax bracket. If you’re in the 22% bracket, that $5,000 deduction saves you about $1,100 in taxes.

  
  

Common deductions include:

• Mortgage interest

• State and local taxes (up to the $10,000 SALT cap)

• Charitable contributions

• Student loan interest

  
  

What Are Credits?

A credit directly reduces your tax bill, dollar for dollar.

For example:

• If you owe $3,000 in taxes and claim a $1,000 credit, your bill drops to $2,000.

  
  

Credits can be:

• Nonrefundable credits – reduce your tax bill to zero, but not below. (Example: Child and Dependent Care Credit)

• Refundable credits – can reduce your tax bill to zero and give you money back if the credit exceeds your liability. (Example: Earned Income Tax Credit)

Why the Difference Matters

• A $1,000 deduction lowers your taxable income, saving you only a portion of that amount depending on your tax bracket.

• A $1,000 credit lowers your tax bill by the full $1,000.

  
  

This makes credits generally more valuable than deductions of the same dollar amount.

Quick Example

Let’s say you’re in the 22% tax bracket:

• A $1,000 deduction saves you about $220 in taxes.

• A $1,000 credit saves you the full $1,000.

  
  

Tax Tip Takeaway

Knowing the difference between deductions and credits can help you file smarter and plan better. Deductions reduce the amount of income subject to tax, while credits reduce the tax itself. When reviewing your tax return, be sure you’re taking advantage of both where you qualify.

When it comes to taxes, deductions and credits are not created equal. Deductions lower the income you’re taxed on, while credits reduce your tax bill directly — sometimes even resulting in a refund. Knowing the difference can make a real impact on how much you save each year. By understanding how each works and which ones apply to your situation, you can file with more confidence and keep more money in your pocket.

If you’re unsure about what deductions and credits you qualify for, don’t leave money on the table — let MKHS Tax Group guide you through the process.

📩 Contact us at info@mkhstaxgroup.com for personalized tax help.