Tax deductions and tax credits both reduce your overall tax burden, but do so in different ways. Because they both save you a significant amount of money on your taxes, it is important to take advantage of all the eligible deductions and credits available to you. Continue reading to learn more about the difference between tax deductions and tax credits.
What is a Tax Deduction?
A tax deduction is an expense that can be subtracted from your gross income to lower the amount of income subject to tax. A common deduction on your federal income tax return is the standard deduction. For example, if your income was $50,000, and your standard deduction for 2024 is $14,600 (if single or married filing separately), you would reduce your taxable income by $14,600. Your taxable income would now be $35,400 ($50,000 income less $14,600 standard deduction).
What is a Tax Credit?
Unlike tax deductions, tax credits are subtracted directly from the taxes you owe (rather than from your taxable income). A common tax credit for parents is the Child Tax Credit, which is up to $2,000 for each dependent child under the age of 17.
Other examples of common tax credits are the Earned Income Tax Credit, the American Opportunity Tax Credit, and the Lifetime Learning Credit. In addition, some credits are refundable, which means that even if you have no tax liability you will receive a refund. Other tax credits are non-refundable, which means they can only reduce your tax liability to zero.
Is a Tax Deduction Better Than a Tax Credit? Is a Tax Credit Better Than a Tax Deduction?
If you were ever faced with a hypothetical choice between a $100 deduction and a $100 credit, you would most likely prefer to receive the credit. Unlike a deduction, a $100 credit reduces your tax liability dollar-for-dollar ($100). In this case, the $100 credit would reduce your taxes due by $100. On the other hand, a deduction reduces your taxable income by $100. The resulting amount of tax you save depends on your marginal tax bracket (in everyday language: your tax bracket). Therefore, if you were in the 24% tax bracket for tax year 2024, a $100 deduction reduces your taxes by $24.
Itemized vs. Standard Deductions
Just about everyone qualifies for the standard deduction. Although the amount varies depending on your filing status (e.g., single, married filing jointly, married filing separately, or head of household), all people with the same filing status receive the same standard amount. The only exceptions are for the elderly, disabled, or blind, who are eligible for higher standard deductions.
In contrast, there are lots of different itemized deductions, and their amounts vary by individual. People commonly itemize when they have:
- Certain medical and dental expenses above 7.5% of your adjusted gross income
- State income taxes
- State sales and local tax
- Property taxes
- Charitable contributions
- Mortgage interest
In order for the itemized deductions to be beneficial to you, they must exceed your standard deduction ($14,600 if you are single and $29,200 if married filing jointly for tax year 2024). Each taxpayer is permitted to take the higher of their standard or itemized deductions – but cannot deduct both.
For example, if you are married and filing jointly, your standard deduction is $29,200. Let’s further say the total of your itemized deductions is $29,600. Since your itemized deductions exceeds your standard deduction by $400, you would most likely take the itemized deduction. This is why it is beneficial to keep track of additional tax-deductible expenses that may bump you up over the standard deduction and leave you open to additional deductions, like charitable contributions.
On the other hand, if your itemized deductions totaled any amount less than the standard deduction you qualify for, you likely wouldn’t bother itemizing – you’d just take the standard deduction. Under tax reform, TurboTax estimated, and the IRS confirmed that about 90% of taxpayers now take the standard deduction since it has almost doubled for taxpayers and because some itemized deductions were either reduced or eliminated. Prior to tax reform, about 70% of taxpayers claimed the standard deduction.
For answers to this question and anything else related to your tax situation, TurboTax Live tax experts are available in English and Spanish, year-round, and can even review, sign, and file your tax return.
No matter what moves you made last year, TurboTax will make them count on your taxes. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund – guaranteed.
