Tax credits and tax deductions are two different types of tax breaks. Both can lower your tax bill, but they work in different ways. Continue reading to discover how each can benefit you.
What is an example of a tax credit vs. tax deduction?
When it comes to understanding the difference between a tax credit and a tax deduction, consider these examples. A tax deduction reduces the amount of income that is subject to taxation, effectively lowering your taxable income. For instance, if you have $50,000 in income and you claim a $5,000 deduction, your taxable income drops to $45,000, resulting in a lower tax liability based on your tax bracket.
On the other hand, a tax credit directly reduces the amount of tax you owe, making it generally more beneficial than a deduction. For example, if you owe $1,000 in taxes and qualify for a $500 tax credit, your tax bill is reduced to $500. In this way, tax credits provide a dollar-for-dollar reduction in your tax obligation.
What is a tax deduction?
A tax deduction is an expense you can subtract from your yearly income. Deductions are taken before you calculate how much of your income is taxable. That means you should subtract any tax deductions from your income before you calculate your tax bill.
What is the standard deduction?
The standard deduction is a set dollar amount that the IRS allows you to subtract from the income you report. Most taxpayers are eligible, and you don’t need to keep track of any receipts or records to take this write-off. The amount of the standard deduction depends on a few factors:
- Your filing status
- Your age (and your spouse’s age if applicable)
- Whether you or your spouse are blind
- Whether you can be claimed as a dependent on someone else’s tax return
Each year the IRS adjusts the standard deduction based on inflation. Here are the most up to date standard deduction amounts for tax year 2024 (returns filed in 2025).
| Filing Status | Standard Deduction |
| Single | $14,600 |
| Married Filing Separately | $14,600 |
| Married Filing Jointly | $29,200 |
| Qualifying Widow(er) | $29,200 |
| Head of Household | $21,900 |
Taxpayers over age 65 or who are blind are eligible for an additional $1,850. On the other hand, taxpayers who can be claimed as a dependent on someone else’s tax return may receive a lower standard deduction.
What are itemized deductions?
Itemized deductions are specific expenses you can write off if you are not taking the standard deduction. Itemizing is slightly more complicated than claiming the standard deduction, because you must keep detailed records of the expenses you claim.
Let’s look at some common examples of itemized deductions. These deductions are reported on Schedule A of Form 1040:
- Business travel expenses – Work-related travel expenses include transportation, lodging and meals, shipping and baggage, laundry, and dry cleaning.
- Casualty, disaster, and theft loss – If you were impacted by a federally declared disaster, you could claim the loss relating to your home, household items, and vehicles on your federal income tax return.
- Business use of your home or car – If you are a W-2 employee, you cannot deduct your home office, as the Tax Cuts and Jobs Act eliminated the unreimbursed employee expenses deduction in 2018. However, you may qualify for tax breaks for dedicated home office space if you are self-employed.
- Charitable gifts – Qualified organizations include charity groups like Goodwill and the Salvation Army as well as religious and educational groups. If you qualify, you can deduct the fair market value of contributions on your return.
- Home mortgage interest – The IRS incentivizes homeowners by allowing a deduction on interest paid on qualifying mortgage loans.
- Medical & dental expenses – Out-of-pocket or unreimbursed medical and dental expenses like preventative care, treatment expenses, and prescription medications are eligible expenses to claim as itemized deductions.
Deductible state, local, and foreign income taxes – The IRS considers state and local taxes to be deductible nonbusiness taxes, meaning you can claim amounts paid in the current tax year as an itemized deduction.
Should I itemize or take the standard deduction?
The answer to this question depends on your specific financial situation. For example, if you have out-of-pocket medical expenses, a mortgage, or make student loan payments, it might be in your best interest to itemize your deductions instead of taking the standard deduction.
Still need help determining if you should itemize deductions? TaxSlayer can help. As you’re filing your tax return, our program will automatically calculate your itemized deductions, compare them against your standard deduction, and allow you to use whichever is most beneficial to you.
What is a tax credit?
A tax credit is a dollar-for-dollar amount that can be subtracted from your tax bill once you’ve calculated how much you owe for income tax. Each tax credit may have specific eligibility rules that you must meet, and you may be required to file certain IRS forms to claim them.
A credit will fall into one of three categories:
- Non-refundable tax credit: A credit that can bring your tax bill down to $0. But any remaining credit does not come back to you in your refund. Example: Adoption Tax Credit and Child and Dependent Care Credit
- Refundable tax credit: If the amount of credit is greater than what you owe for taxes, you receive the remaining portion of your refund. Example: Earned Income Tax Credit (EITC)
- Partially refundable tax credit: Allows taxpayers to receive a refund for a portion of the credit even if their tax liability is reduced to zero. Example: American Opportunity Tax Credit (AOTC) and Child Tax Credit
Refundable tax credits are a larger benefit because if the credit you claim is more than your total tax bill, you can keep the difference.
Are tax credits or deductions better?
One isn’t necessarily better than the other. A tax break is a tax break, and every little bit helps.
TaxSlayer finds any and all possible tax breaks for you. We do the work, so you can be sure you’re getting the maximum refund – guaranteed.
