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Tax Credit vs. Tax Deduction
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do not influence our editors’ opinions or ratingsTax Credit vs. Tax Deduction
Tax deductions reduce your taxable income, but tax credits reduce your bill dollar for dollar.
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Editor & Content Strategist
23 years of experience Expertise Taxes Small business Social Security and estate planning Home services RIATina Orem is an editor and content strategist at NerdWallet. Prior to becoming an editor and content strategist, she covered small business and taxes at NerdWallet. She has a degree in finance, as well as a master's degree in journalism and an MBA. Previously, she was a financial analyst and director of finance at public and private companies. Tina's work has appeared in a variety of local and national media outlets.
Tina Orem is an editor and content strategist at NerdWallet. Prior to becoming an editor and content strategist, she covered small business and taxes at NerdWallet. She has a degree in finance, as well as a master's degree in journalism and an MBA. Previously, she was a financial analyst and director of finance at public and private companies. Tina's work has appeared in a variety of local and national media outlets. Published in Editor & Content Strategist + more + moreTax credits and tax deductions may be the most satisfying part of preparing your tax return. Both reduce your tax bill but in very different ways.
Tax credits and tax deductions may be the most satisfying part of preparing your tax return. Both reduce your tax bill but in very different ways.Tax credits directly reduce the amount of tax you owe, giving you a dollar-for-dollar reduction of your tax liability. A tax credit valued at $1,000, for instance, lowers your tax bill by the corresponding $1,000.
Tax credits Tax credits directly reduce the amount of tax you owe, giving you a dollar-for-dollar reduction of your tax liability. A tax credit valued at $1,000, for instance, lowers your tax bill by the corresponding $1,000.Tax deductions, on the other hand, reduce how much of your income is subject to taxes. Deductions lower your taxable income by the percentage of your highest federal income tax bracket. So if you fall into the 22% tax bracket, a $1,000 deduction saves you $220.
Tax deductions Tax deductions , on the other hand, reduce how much of your income is subject to taxes. Deductions lower your taxable income by the percentage of your highest federal income tax bracket. So if you fall into the 22% tax bracket, a $1,000 deduction saves you $220.Tax credit vs. tax deduction example
Tax credit vs. tax deduction exampleThe example scenario below illustrates the difference between how tax deductions and tax credits work. As you can see, both benefits can lower your taxes owed — but how they are applied differs. Generally, a tax credit can have a larger impact because it reduces your taxes owed instead of reducing the income you'll get taxed on. Still, it's worth learning about both types of benefits when looking for ways to catch a break on your taxes.
The example scenario below illustrates the difference between how tax deductions and tax credits work. As you can see, both benefits can lower your taxes owed — but how they are applied differs. Generally, a tax credit can have a larger impact because it reduces your taxes owed instead of reducing the income you'll get taxed on. Still, it's worth learning about both types of benefits when looking for ways to catch a break on your taxes.$10,000 tax deduction
$10,000 tax deduction $10,000 tax deduction$10,000 tax credit
$10,000 tax credit $10,000 tax creditYour AGI
Your AGI$100,000
$100,000$100,000
$100,000Tax deduction
Tax deduction–$10,000
–$10,000Taxable income
Taxable income$90,000
$90,000$100,000
$100,000Tax rate*
Tax rate*25%
25%25%
25%Calculated tax
Calculated tax$22,500
$22,500$25,000
$25,000Tax credit
Tax credit–$10,000
–$10,000Your tax bill
Your tax bill Your tax bill$22,500
$22,500 $22,500$15,000
$15,000 $15,000*Example rate. The U.S. has a progressive tax system.
*Example rate. The U.S. has a progressive tax system. *Example rate. The U.S. has a progressive tax system.» MORE: Popular tax deductions and tax breaks
» MORE: » MORE: Popular tax deductions and tax breaks AD Owe $10,000+ or More? This Tax Season Could Be Your Chance to Qualify Each year the IRS writes off millions in tax debt, yet few have applied. Learn moreon Anthem Tax Services' website
AD Let’s resolve your tax issues: Tax Relief & Resolution Services for IRS Tax Debt Certified Enrolled Agents, CPAs, and Tax Attorneys on your case. Learn moreon TaxRise's website
The catch to tax credits
The catch to tax creditsSome tax credits are nonrefundable. That means that if you don’t owe a lot in taxes to begin with, you don’t get the full value if the credits take your tax bill below zero. In other words, a $600 tax bill combined with a $1,000 nonrefundable credit doesn’t get you a $400 tax refund check — just a $0 tax bill.
Some tax credits are nonrefundable. Some tax credits are nonrefundable. That means that if you don’t owe a lot in taxes to begin with, you don’t get the full value if the credits take your tax bill below zero. In other words, a $600 tax bill combined with a $1,000 nonrefundable credit doesn’t get you a $400 tax refund check — just a $0 tax bill.Some tax credits are refundable. If you qualify to take refundable tax credits — things such as the earned income tax credit or the child tax credit — the value of the credit goes beyond your tax liability and can result in a refund check.
Some tax credits are refundable. Some tax credits are refundable. If you qualify to take refundable tax credits — things such as the earned income tax credit or the child tax credit — the value of the credit goes beyond your tax liability and can result in a refund check.The IRS lays out specific criteria you must meet to qualify for both nonrefundable and refundable credits.
The IRS lays out specific criteria you must meet to qualify for both nonrefundable and refundable credits.» MORE: What tax credits can I qualify for?
» MORE: » MORE: What tax credits can I qualify for?A big decision about tax deductions
A big decision about tax deductionsThere are two types of tax-deduction strategies: taking the standard deduction or itemizing.
There are two types of tax-deduction strategies: taking the standard deduction or itemizing.The standard deduction
The standard deductionThe standard deduction is a one-size-fits-all reduction in the amount of your income that’s subject to tax. You don’t have to do anything to qualify for the standard deduction or provide any documentation.
The standard deduction is a one-size-fits-all reduction in the amount of your income that’s subject to tax. You don’t have to do anything to qualify for the standard deduction or provide any documentation.You can claim the standard deduction on Form 1040. The amount varies depending on your filing status.
You can claim the standard deduction on Form 1040 . The amount varies depending on your filing status.Filing status
Filing status
Filing statusDeduction amount
Deduction amount
Deduction amountSingle
Single$15,750.
$15,750.Married filing separately
Married filing separately$15,750.
$15,750.Head of household
Head of household$23,625.
$23,625.Married filing jointly
Married filing jointly$31,500.
$31,500.Surviving spouses
Surviving spouses$31,500.
$31,500. AD Owe $10,000+ or More? This Tax Season Could Be Your Chance to Qualify Each year the IRS writes off millions in tax debt, yet few have applied. Learn moreon Anthem Tax Services' website
AD Let’s resolve your tax issues: Tax Relief & Resolution Services for IRS Tax Debt Certified Enrolled Agents, CPAs, and Tax Attorneys on your case. Learn moreon TaxRise's website
Itemizing
ItemizingItemizing allows you to take advantage of deductions such as home mortgage interest, medical expenses or charitable donations. If together your itemized deductions exceed the value of the standard deduction, you'll want to itemize so you pay less tax. You'll need to use the regular Form 1040 and Schedule A.
Itemizing allows you to take advantage of deductions such as home mortgage interest, medical expenses or charitable donations. If together your itemized deductions exceed the value of the standard deduction, you'll want to itemize so you pay less tax. You'll need to use the regular Form 1040 and Schedule A .Taking the standard deduction or itemized deductions is an either/or situation. You can do one or the other, but not both.
Taking the standard deduction or itemized deductions is an either/or situation. You can do one or the other, but not both.Just as with tax credits, taking certain deductions requires meeting certain qualifications based on your filing status, current life events and the amount of your income that’s taxable. Be sure you meet IRS criteria to qualify for both tax credits and deductions.
Just as with tax credits, taking certain deductions requires meeting certain qualifications based on your filing status, current life events and the amount of your income that’s taxable. Be sure you meet IRS criteria to qualify for both tax credits and deductions. About the author Tina Orem Tina Orem Tina Orem is an editor and content strategist at NerdWallet. Before becoming an editor and content strategist, she was NerdWallet's authority on taxes and small business. Her work has appeared in a variety of local and national outlets. See full bio.Helpful resources
Helpful resources How Federal Tax Brackets and Rates Work Federal Income Tax Calculator and Refund Estimator 2025-2026 Capital Gains Tax: Long and Short-Term Rates for 2025-2026 10 Key IRS Tax Forms, Schedules and Publications for 2026 More like this Taxes Tax Planning: 7 Tax Strategies and Concepts to Know Know your bracket, how key tax ideas work, what records to keep and basic steps to shrink your tax bill. 2 By Sabrina Parys, Tina Orem How to File Taxes: A 2026 Tax Filing Guide Whether you're a first-time filer or just need help learning how to file taxes on your own, here's a quick guide that covers how, when and where to file your return. 2 By Sabrina Parys, Tina Orem How Much Do You Have to Make to File Taxes? According to the IRS, here's how much you have to have made in 2025 to be required to file taxes in 2026 and the general rules for whether you need to file a federal tax return this year. 2 By Sabrina Parys, Tina Orem