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

Both tax credits and tax deductions allow you to reduce a taxpayer’s tax liability, but they work in fundamentally different ways. Understanding this distinction is the first step to maximizing your refund.

• A tax credit directly reduces the amount of tax you owe to the IRS.

• A tax deduction reduces your taxable income, resulting in that income being taxed at a lower rate.

You are entitled to claim both credits and deductions provided your taxpayer status meets the necessary requirements.

How Tax Credits Differ from Tax Deductions

Tax credits are subtracted directly from the tax bill. They come in two types: refundable (can result in a refund check even if you owe $0) and non-refundable (can only reduce your tax bill to $0).

Tax deductions are often considered less advantageous dollar-for-dollar than credits because they only reduce the income subject to tax, rather than the tax itself.

There are two main types of deductions: the Standard Deduction and Itemized Deductions. However, you cannot use both simultaneously; you must choose the one that offers the greater benefit.

Comparison: Credits vs. Deductions

Types of Tax Credits

Tax credits are powerful tools for reducing liability. The most popular tax credits include:

• Adoption Credit

• American Opportunity Credit (for education expenses)

• Earned Income Tax Credit (EITC)

• Child Tax Credit

• Child and Dependent Care Credit

• Credit for the Elderly or Disabled

• Lifetime Learning Credit (for education expenses)

• Credit for Other Dependents (for dependents who don’t meet the age requirements for the Child Tax Credit)

• Premium Tax Credit (for health insurance purchased in compliance with the Affordable Care Act)

• Saver’s Credit (for contributions made to retirement accounts)

Note: This list is not exhaustive. A complete list of available credits can be found on the IRS website.

Key Credits Explained

Earned Income Tax Credit (EITC)

Designed to return money to taxpayers with low and moderate income. EITC is refundable, meaning you can get money back even if you owe no tax. However, you can only claim it if your income is below the established level, and you cannot use it if you receive no income at all.

Child and Dependent Care Credit

This is paid to taxpayers who have paid expenses for the care of dependents (adults who cannot care for themselves independently, or children under 13 or who have disabilities) so that the taxpayer can work.

Child Tax Credit

This can be obtained for each child-dependent who has not reached the age of 17 as of December 31.

• Residency Rule: The child must live with you for at least 6 months per year.

• Support Rule: The child should not pay more than half of their own expenses.

• Amount: Up to $2,000 per qualifying child.

Types of Tax Deductions

1. The Standard Deduction

The Standard Deduction is a fixed amount that reduces your taxable income. The final amount depends on your age, income, and filing status. It increases slightly each year to keep pace with inflation.

Standard Deduction Amounts (2025–2026)

2. Itemized Deductions

Itemized Deductions can be used only if they exceed the Standard Deduction amount for your filing status. These allow you to deduct specific actual expenses incurred during the tax year.

To claim these, you must list expenses on Schedule A and submit it with your tax return. The actual amount varies by taxpayer. Common itemized deductions include:

• State and local taxes (SALT)

• Real estate taxes

• Mortgage interest

• Charitable contributions

• Uncovered medical and dental expenses

3. Above-the-Line Deductions (Adjustments to Income)

These deductions reduce your Adjusted Gross Income (AGI). They are deducted “above the line” that determines your AGI on Form 1040.

The One Big Beautiful Bill Act (OBBBA) introduces new rules and limits for above-the-line deductions starting in 2025:

To receive these deductions, you must complete and submit Schedule 1 with your tax return.

Conclusion: Which Should You Choose?

Speaking of practicality, if you have a choice, it is generally more advantageous to use tax credits because credits are directly deducted from the tax bill itself.

• Tax deductions only reduce your taxable income, potentially placing you in a lower income tax bracket.

• Above-the-line deductions reduce your AGI, which may help you qualify for additional credits and deductions.

Remember: You can use both deductions and credits, but you must choose between Itemized Deductions and the Standard Deduction — you cannot apply both.

If you are not sure which tax credits and tax deductions you can claim, we recommend consulting with a tax professional to avoid mistakes.

How Can Gennadiy Arnautov CPA Help?

Tax credits and tax deductions are powerful tools for reducing tax burden, but their effectiveness depends on the correct choice and application. Our specialists will help:

• Determine which tax credits and deductions are available in your specific situation.

• Choose between the Standard Deduction and Itemized Deductions for maximum benefit.

• Develop a tax strategy that will reduce taxes not only this year but also in the future.

Don’t leave money on the table! The right combination of tax credits and tax deductions can save hundreds or even thousands of dollars annually.

Contact Gennadiy Arnautov CPA for professional consultation and personalized tax planning.