Tax Credits vs. Tax Deductions: What Are the Differences?

As you file taxes, you may have the opportunity to claim tax credits and deductions. While both can help lower your tax liability, they do so in different ways. Tax deductions reduce the amount of your income that’s subject to tax, while tax credits directly reduce the amount of tax you owe. 

Read on to learn more about tax credits vs. tax deductions and how they work together to help you save at tax time.  

What is a Tax Credit?

Once you know how much you owe in taxes, tax credits allow you to subtract specific amounts directly from your tax bill. 

Some credits are fully or partially refundable, meaning they can reduce your tax liability below zero and generate a refund. Others are nonrefundable, meaning they can only bring your tax balance to zero—any extra amount won’t be refunded. 

Here are some commonly claimed tax credits: 

• Earned Income Tax Credit: A refundable credit of up to $7,830 in 2024 for low- to moderate-income workers and families who meet income eligibility requirements.
• Child Tax Credit: A nonrefundable credit of up to $2,000 per child (under the age of 17) in 2024 for families with qualifying dependents.
• American Opportunity Tax Credit: A partially refundable credit of up to $2,500 in 2024 for eligible students with qualified educational expenses for four years of post-secondary education. If the credit brings your tax liability to zero, 40% of the remaining amount (up to $1,000) can be refunded. 
• Lifetime Learning Credit: A nonrefundable credit of up to $2,000 in 2024 to help cover qualified tuition and related expenses for undergraduate, graduate, and professional degree courses.
• Saver’s Tax Credit: A nonrefundable tax credit of up to $2,000 in 2024 for eligible contributions to an IRA or employer-sponsored retirement plan.

What is a Tax Deduction?

A tax deduction is an amount you subtract from your gross income to lower your taxable income. When filing an individual tax return, you’ll need to choose between taking the standard deduction or itemizing deductions (more on that below).

Standard Deduction or Itemized Deductions?

The standard deduction is a fixed dollar amount that lowers your taxable income and simplifies tax filing by eliminating the need to itemize deductions. Available to most taxpayers, the deduction amounts are set annually by the IRS and vary based on filing status. 

Let’s look at some hypothetical examples of the standard deduction in action. In 2024, a single filer with an income of $50,000 qualifies for a standard deduction of $14,600, which reduces their taxable income to $35,400. On the other hand, a head-of-household filer earning $50,000 qualifies for a $21,900 standard deduction, which brings their taxable income down to $28,100.

Unlike the standard deduction, itemizing your deductions allows you to subtract the total of certain individual deductions from your gross income. Common itemized deductions include:

• Medical and dental expenses
• State and local taxes (SALT)
• Charitable contributions
• Mortgage interest
• Casualty and theft losses

To itemize, you list each deduction you qualify for (some may be reduced based on your income), add them up, and subtract the total from your gross income. If your itemized deductions exceed the standard deduction for your filing status, itemizing may result in a lower tax bill. Otherwise, taking the standard deduction is typically the better option.

If you qualify for the standard deduction, the IRS recommends adding up your itemized deductions and comparing them to your standard deduction to see which route will save you more. Note, there are also deductions that act as adjustments to your income and are not restricted to only those that choose to itemize their deductions. For example, student loan interest, and educator expenses can lower your income before the standard or itemized deductions are applied

The TurboTax standard vs. itemized deduction calculator can help you crunch the numbers. 

Tax Credits vs. Tax Deductions: An Example

So how do both deductions and credits work on your return? Let’s look at this example:

 Allison is a head of household tax filer who earned a gross income of $75,000 in 2024. Her itemized deductions total $15,000, while her standard deduction is $21,900. She decides to go with the standard deduction, bringing her taxable income down to $53,100 and resulting in a federal tax liability of $6,041. From there, she qualifies for $5,000 in tax credits, bringing her tax bill down to $1,041. 

Gross income	$75,000
Standard deduction	$21,900
Taxable income	$53,100
Taxes due	$6,041
Tax credits	$5,000
Final tax bill	$1,041

Allison’s tax deductions reduced her taxable income while the tax credits directly reduced the taxes she owed. Without either, her tax bill would’ve been $9,859.

Deciding Which Tax Credits and Deductions are Right for You

The IRS provides a long list of tax credits and deductions that can potentially help you lower your tax liability. The challenging part is identifying everything you can claim and filing the correct paperwork. TurboTax streamlines those steps. 

Kris Druffel, EA, offers a few examples of how this works. “TurboTax will ask if you own a home. Your answer may prompt TurboTax to ask about Form 1098 reporting Home Mortgage Interest, which may be deductible. TurboTax also asks about your dependents and automatically calculates the Child Tax Credit based on that information.”

In general, all you have to do is answer a series of simple questions about your finances from the tax year. We’ll take care of the rest, ensuring you don’t pay more than you should. 

Start your stress-free tax filing with TurboTax today!

FAQs

How often do tax credits and deductions change?

Tax credits and deductions are updated annually, with many adjusted for inflation and others changing due to new legislation.

How do I know if I qualify for tax credits and deductions?

The IRS provides detailed eligibility guidelines for each tax credit and deduction on its website. If that sounds a bit overwhelming, don’t worry. TurboTax makes it easy. Just answer a few simple questions, and we’ll identify the credits and deductions you qualify for—so you don’t miss out on savings.

How can I claim itemized deductions on TurboTax?

You can claim itemized deductions in the Deductions and Credits section of the TurboTax filing process. Additionally, our software helps you determine if the standard deduction or itemized deductions will provide you with the best outcome.

What is better: a tax credit or a deduction?

Both tax credits and deductions can reduce your tax liability. However, tax credits are typically more valuable because they reduce your tax bill by the face amount of the credit, while deductions reduce the amount of your income that’s taxed. For example, a $2,000 deduction will reduce your tax bill by $240 if you’re in the 12% tax bracket, while a $2,000 credit will reduce it by $2,000.

Should you claim both tax credits and deductions?

If you qualify for both tax credits and deductions, you can and should claim both. Doing so can help to lower your tax bill and potentially increase your refund.