Tax Credit vs. Tax Deduction: What’s the Difference?

What Is a Tax Credit?

Tax credits directly lower the amount of taxes you owe, providing you with a dollar-for-dollar reduction. If you qualify for a $3,000 tax credit, for example, you'll save $3,000 on your tax bill.

In some cases, a tax credit can not only lower your tax bill but can also result in a tax refund. For example, if you qualify for a fully refundable $1,000 tax credit and you only owe $700 in taxes, you'll receive a tax refund for the $300 in excess credit.

Not all tax credits are refundable, however. A nonrefundable tax credit can lower your tax bill down to $0, but if the credit is worth more than you owe, a nonrefundable credit won't result in a payment from the IRS for the difference.

Common Tax Credits

Here are some popular tax credits you may use to lower your tax bill or increase your refund:

• Child tax credit: The child tax credit is a nonrefundable tax credit for families with qualifying children. The child tax credit provides up to $2,200 per child and is available for families whose income is less than $200,000 for single filers or less than $400,000 for those filing jointly. Families must earn at least $2,500 to qualify.
• Additional child tax credit: Through the additional child tax credit, families with little or no tax liability can receive up to $1,750 in refundable tax credits per qualifying child.
• Child and dependent care credit: The child and dependent care credit helps cover care costs for an eligible child or other dependent while you and your spouse work. This credit provides up to $3,000 in credit for one qualifying child, or up to $6,000 for two or more children, calculated based on your income and a percentage of the care costs.
• Earned income tax credit: The earned income tax credit is a refundable tax credit that helps qualifying low- to moderate-income earners reduce their tax bills. Eligibility for the earned income tax credit and the amount of credit you're eligible to receive varies depending on your filing status and family size.
• American opportunity tax credit: The American opportunity tax credit helps cover expenses for the first four years of higher education. Eligible students (or taxpayers who claim them as dependents), can claim a maximum annual credit of $2,500. If the credit reduces a tax bill to zero, 40% of any remaining credit (up to $1,000) can be received as a tax refund.

What Is a Tax Deduction?

A tax deduction reduces your taxable income and, in turn, lowers the amount of tax you owe. Unlike a tax credit, a deduction doesn't lower your tax bill directly. Instead, the amount a deduction lowers your tax liability depends on your income tax bracket.

Your tax bracket determines the tax rate you pay on different segments of your income. The term "tax bracket" is shorthand for your top marginal tax rate. Because marginal tax rates increase as your income rises, deductions generally save more money for people with higher incomes.

For reference, here's how 2026 tax brackets break down for single filers and married couples filing jointly:

Source: IRS

This is how tax deductions play out for people in different tax brackets: If you're a single tax filer earning $250,000 a year, a $2,000 tax deduction could save you 35% of $2,000, or $700. If your top income bracket is 22%, the same $2,000 deduction would save you $440.

Common Tax Deductions to Lower Your Taxable Income

Here are some popular tax deductions that may help you lower your taxable income:

• State and local tax (SALT) deduction: If you itemize, you can deduct up to $40,000 in state and local taxes you've paid in the current tax year, including state income taxes, property taxes and sales tax.

• New car loan interest deduction: You may deduct up to $10,000 in interest on a new car loan. To be eligible, you must have purchased a vehicle for personal use after December 31, 2024 (through December 31, 2028).

  Learn more: How the New 2025 Tax Law Changes Affect You

• Additional standard deductions for seniors: People ages 65 and older can take an additional $2,000 standard deduction (or $1,600 per qualifying person if you're married filing jointly or separately). Also, from 2025 through 2028, seniors can take a second additional standard deduction of $6,000, thanks to a provision in the 2025 One Big Beautiful Bill Act. Your adjusted gross income must not exceed $75,000 for a single filer or $150,000 for joint filers to qualify for the full $6,000 deduction.
• Tax deduction for tips: From 2025 to 2028, employees and self-employed people can deduct up to $25,000 for qualified tips reported on a W-2 or 1099. You must meet IRS income limits, but do not have to itemize to take advantage of this deduction.
• Mortgage interest deduction: You can deduct monthly interest on the first $750,000 in mortgage debt you carry on your primary or secondary home (the limit is $375,000 if you're married filing separately).

• Deducting 401(k) or IRA contributions: You may be able to deduct contributions to a traditional 401(k) retirement plan or IRA, up to IRS contribution limits. Contributions to a Roth IRA or 401(k) are not deductible.

  Learn more: 401(k) and IRA Contribution Limits for 2026

• Deductible medical and dental expenses: Taxpayers who itemize may deduct qualifying medical and dental expenses that exceed 7.5% of their adjusted gross income. Qualifying expenses include unreimbursed care costs, medical insurance premiums and out-of-pocket dental expenses.

• Home office deduction: If you use your home office exclusively for qualified business purposes, a home office deduction can help you write off a portion of the rent or mortgage interest, utilities, property taxes and maintenance you pay based on the square footage you use as dedicated business space.

  Learn more: What Can You Deduct on Your Taxes?

Tax Credit vs. Tax Deduction: Which Lowers Your Taxes More?

A tax credit lowers your taxes more than a tax deduction of the same amount. That's because a tax credit reduces your taxes dollar for dollar, while a tax deduction only lowers your taxable income.

To understand the difference, consider a $1,000 tax credit versus a $1,000 tax deduction.

A $1,000 tax credit saves you $1,000 on taxes, with no additional calculation required.

Figuring out how much a tax deduction saves you requires a bit more math: You multiply the amount of the deduction by your top marginal tax rate (or tax bracket). For example, if your top marginal tax rate is 15%, a $1,000 tax deduction saves you $150 (0.15 x $1,000)—quite a bit less than your $1,000 tax credit.

Being in a higher tax bracket increases the value of your deduction. Still, if you're in the top tax bracket, you'll save 37% of $1,000, or $370. Even in this best-case scenario, a tax deduction saves you less than a tax credit does.

Frequently Asked Questions

The Bottom Line

Tax credits and tax deductions are two different tools you can use to reduce your tax bill. Though it's helpful to understand the differences between tax credits and deductions, you don't have to choose one or the other: You should claim every credit and deduction you're entitled to.

If you need help filing your taxes, reaching out to an accountant can help you navigate taxes and maximize your deductions and tax credits. You may also qualify for a number of free tax preparation options for taxpayers with various incomes.