What is the difference between a deduction and a credit on my tax return?

Hi all, I'm really confused about something that should probably be basic tax knowledge, but here we are. I've been doing my own taxes for about 5 years now using TurboTax, but I just realized I don't actually understand the difference between tax deductions and tax credits. I know they both save me money somehow, but they seem to affect my refund differently. Last year, I had some student loan interest that was deductible, and I also qualified for the Child Tax Credit since my daughter was born. But when I was playing around with the numbers in the software, it seemed like the credit made a much bigger impact on my refund dollar-for-dollar compared to the deduction. Can someone explain this to me like I'm five? What exactly is the difference between these two things and why should I care? Also, should I be trying to maximize one over the other? Sorry if this is super basic, but I want to make sure I'm not missing something important for this year's tax filing!

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18 comments

Madeline Blaze

•8M

The difference is actually pretty straightforward! A tax deduction reduces the amount of income you're taxed on, while a tax credit directly reduces your tax bill dollar-for-dollar. Let's say you're in the 22% tax bracket. A $1,000 deduction would reduce your taxable income by $1,000, saving you $220 in taxes (22% of $1,000). But a $1,000 tax credit would reduce your actual tax bill by the full $1,000, regardless of your tax bracket. That's why your Child Tax Credit had a bigger impact than your student loan interest deduction! Credits are generally more valuable than deductions of the same amount. Some credits, like the Earned Income Tax Credit, are even refundable, meaning you can get money back even if you don't owe any taxes. When preparing your taxes, you should definitely take advantage of all deductions and credits you qualify for, but if you have to focus your effort somewhere, understanding available credits is often where you'll find the biggest benefits.

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Madeline Blaze

•8M

Yes, credits generally give you more "bang for your buck" so they're worth paying special attention to. But don't ignore deductions either - they all help! Some commonly overlooked credits include the American Opportunity Credit and Lifetime Learning Credit for education expenses, the Saver's Credit if you contribute to retirement accounts, the Child and Dependent Care Credit for daycare expenses, and energy efficiency credits for home improvements. Also, depending on your situation, the Premium Tax Credit for health insurance through the marketplace can be substantial.

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Emma Swift

•8M

I struggled with this exact same confusion last year until I found taxr.ai (https://taxr.ai) which really helped me understand the difference between deductions and credits. I was getting so frustrated trying to figure out which was which when reading through some old tax documents. You upload your documents and it literally explains everything in plain English - breaks down where deductions are coming from vs credits. It showed me I had missed claiming the Lifetime Learning Credit for some online courses I took, which saved me $847! The explanations are written like a normal person would talk, not in confusing tax language.

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Emma Swift

•8M

It absolutely works with older returns! I actually used it to review my 2023 return first, and that's how I found out I could amend and claim that Lifetime Learning Credit I mentioned. You can upload returns going back several years. The big difference from TurboTax or H&R Block is that those programs ask you questions but don't really explain what's happening with your specific documents. This actually analyzes your forms and explains each line item in plain English, including showing you what credits and deductions you qualified for and which ones you might have missed based on the information in your documents.

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LordCommander

•8M

If you're confused about deductions vs credits AND you need to talk to the IRS about your specific situation, good luck getting through to them on the phone. I spent 3 hours on hold last week trying to ask about how a specific credit affected my payment plan. I finally found Claimyr (https://claimyr.com) and tried their service - you can see how it works here: https://youtu.be/_kiP6q8DX5c. They actually got me connected to an IRS agent in about 15 minutes instead of the hours I was waiting before. The agent walked me through exactly how the different credits affect my payment plan and resolved my issue.

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LordCommander

•8M

They use technology to navigate the IRS phone system and wait on hold for you. When an agent finally answers, they connect the call to your phone. It's not a special line - they're just handling the hold time for you so you don't have to sit there listening to that awful music. It's completely legitimate - they can't make the IRS answer faster, but they handle the waiting part so you don't have to be stuck by your phone. Once connected, you're talking directly to an actual IRS agent, not someone from their company.

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Zoe Wang

•8M

Yes, many deductions have income limits too! Student loan interest deduction starts phasing out at $75,000 for single filers, traditional IRA deduction has limits if you have a workplace retirement plan, and medical expense deductions only count for expenses over 7.5% of your AGI, so higher income means fewer medical expenses qualify. If you got a big raise, definitely look into maxing out your 401(k) or other retirement accounts since that lowers your AGI and might help you qualify for more deductions and credits that have income limits.

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