The Difference Between a Tax Credit and Tax Deduction

Potato, potato. Tomato, tomato. Although these are the same thing, a tax credit and a tax deduction is not.

In my experience, so many people get these terms mixed up or mistake them for being the same thing. But there is a big difference.

Tax Credit

Think of a tax credit like a coupon. You scan a coupon and the dollar amount lowers right before your eyes! Tax credits directly reduce the taxes you owe, dollar-for-dollar. Some tax credits are even refundable — like the child tax credit or the earned income tax credit.

Tax Deduction

Now, with a tax deduction, it’s more like a credit towards your account. It’s not a direct reduction in tax bill dollar-for-dollar, but your account still receives a little something. Basically a tax deduction lowers your overall taxable income.

You may have heard of standard deduction vs. itemized deduction. Understanding that being able to itemize will allow you to take advantage of deductions such as home mortgage interest, medical expenses and/or charitable donations.

Listen, knowing the difference between these key tax components when reviewing your tax returns will help you become an informed tax payer. If you are working with a tax professional, please ask them to review your tax return with you. I know it’s boring — but it’s important.

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