What is the difference between a tax deduction and a tax credit?

Key takeaways

• A tax deduction is a benefit that reduces your adjusted gross income (income minus certain adjustments), lowering your tax and potentially increasing your refund. You can either take the standard deduction or itemize your deductions, but you can’t do both.
• A tax credit is a benefit that directly reduces the amount of tax you owe. Some credits are refundable, meaning they can lead to a refund if they exceed the tax you owe.
• The key differences between tax deductions and tax credits are how they reduce your taxes and impact your refund.
• Common tax deductions you may qualify for include mortgage interest, property taxes, charitable donations, and medical expenses that exceed 7.5% of your income. You may benefit from itemizing these deductions if they add up to more than the standard deduction.
• Common tax credits you may qualify for include the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), and American Opportunity Tax Credit (AOTC). Some credits are refundable, which means they can provide a refund even if you owe no tax.
• Work with a Tax Pro when you file to get every deduction, credit, and dollar you deserve.

What is a tax deduction? 

A tax deduction is a benefit that allows you to subtract a specific amount from your adjusted gross income (AGI), which then reduces your taxable income and, therefore, your tax. For example, if your AGI adds up to $45,000, and you take the $14,600 standard deduction, you’ll only owe tax on $30,400 of your income.  

You have a choice to make when you file. You can either take the standard deduction or itemize your deductions, but you can’t do both.  

So, which is better, taking the standard deduction or itemizing? That depends on your financial situation. Work with a Tax Pro to help you add up all your expenses that can be itemized and compare the total to the standard deduction. Use whichever option is bigger.  

What is a tax credit? 

A tax credit is a benefit that allows you to directly reduce your tax by a specific amount. For example, if your tax is $2,500 and you have a $2,000 tax credit, you’ll only have $500 of tax remaining.  

Some tax credits are even refundable. That means that if the credit you’re taking is greater than your tax, you’ll get whatever is left over as a tax refund. For example, let’s say your tax is $2,500, and you’re taking a refundable tax credit of $3,000. Not only will the credit reduce your tax to $0, but you’ll also get the $500 left over as a refund.  

Not all tax credits are refundable. Some are only partially refundable, which means that you’ll only get a portion of the credit after your tax has been reduced to $0. Other tax credits are nonrefundable, which means that you won’t get any leftover credit as a refund.  

Common tax deductions you may qualify for 

As we mentioned earlier, you’ll have to choose between taking the standard deduction or itemizing your deductions. Here’s a breakdown of each option.  

Standard deduction 2024 

The standard deduction is a set amount you can deduct from your taxable income. The IRS sets the standard deduction amount each year. For single filers in 2024, the standard deduction is $14,600, and for married couples filing jointly, it’s $29,200.  

Taking the standard deduction means that you don’t have to keep careful records of deductible expenses, but there’s a catch. If you take the standard deduction, you cannot take advantage of any itemized deductions you may otherwise qualify for. Remember, you can claim either the standard deduction or total itemized deductions, but not both. 

Itemized deductions 2024 

Itemizing can be worthwhile if your deductible expenses add up to more than the standard deduction amount. For example, if you had significant medical expenses or paid a lot in property taxes during the year, you might get a bigger tax break by itemizing. 

However, itemizing requires more work since you need proper documentation to prove your deductions. It’s also worth noting that some deductions have limits or thresholds, meaning you can only deduct a portion of the expenses. The decision between taking the standard deduction or itemizing comes down to which option reduces your tax the most, and that can change year to year, depending on your circumstances. Work with a Tax Pro every year to ensure you make the right choice. 

Common itemized deductions  

• Mortgage interest: Interest paid on loans for your primary or a second home. 

• Property taxes: State and local property taxes on real estate you own. 

• State and local income taxes or sales taxes: You can choose to deduct either state and local income taxes or the amount you paid in sales taxes. 

• Charitable contributions: Donations made to qualified charitable organizations, including cash and certain non-cash contributions. 

• Medical and dental expenses: Healthcare expenses greater than 7.5% of your adjusted gross income (your total income for the year, minus certain deductions). 

• Personal property taxes: Taxes paid on personal property like vehicles. 

• Casualty and theft losses: Losses from federally declared disasters that weren’t reimbursed by insurance. 

• Investment interest expenses: Interest paid on money borrowed for investments. 

Common tax credits you may qualify for 

Earned Income Tax Credit (EITC) 

The EITC is for low- to moderate-income working individuals and families. The amount of the credit depends on your income, marital status, and the number of children you have. For 2024, the maximum credit ranges from $632 (if you have no children) to $7,830 (if you have three or more qualifying children). The EITC is refundable, which means even if you don’t have any tax, you might still receive a refund. 

Child Tax Credit (CTC) 

If you have children under the age of 17, you may qualify for the CTC. In 2024, this credit is worth up to $2,000 per qualifying child, and up to $1,700 of the credit is refundable, meaning you could get a portion added to your tax refund. The amount you receive depends on your income and how many children you have, and it phases out for higher-income earners. 

American Opportunity Tax Credit (AOTC) 

The AOTC is designed to help with the costs of higher education, such as tuition, books, and supplies during the first four years of college. In 2024, you can claim up to $2,500 per eligible student. Up to $1,000 of this credit is refundable, so you could get money back as a refund. To qualify, you need to be enrolled at least half-time in a program leading to a degree or other recognized credential. 

Lifetime Learning Credit (LLC) 

The LLC helps offset education expenses for college, graduate school, or courses to improve job skills. In 2024, it’s worth up to $2,000 per tax return, regardless of the number of eligible students. Unlike the AOTC, the LLC is non-refundable, which means it can reduce your tax to zero but won’t result in a refund. There’s also no limit on how many years you can claim this credit. 

Child and Dependent Care Credit (the Daycare Credit) 

If you pay for childcare or care for a dependent so you can work or look for work, you may be eligible for the Daycare Credit. In 2024, this credit is worth up to 35% of $3,000 in qualifying expenses for one dependent or $6,000 for two or more dependents. This credit is non-refundable, so it will only reduce your tax but won’t increase your refund. 

Premium Tax Credit (PTC) 

The PTC helps make health insurance that is purchased through the Health Insurance Marketplace more affordable for people and families. The amount of the credit depends on your household income and family size. It is a refundable credit, so it can help reduce your tax or increase your refund. You can choose to have this credit paid to your insurer in advance to lower your monthly health insurance premiums or claim it when you file your tax return. 

Saver’s Credit 

If you contribute to a retirement account like an IRA, 401(k), or similar plan, you might qualify for the Saver’s Credit. In 2024, you can claim 10%, 20%, or 50% of the first $2,000 you contribute, depending on your income. The maximum credit is $1,000 for single filers or $2,000 for married couples filing jointly. This credit is non-refundable, but it’s a great way to save for retirement while lowering your tax. 

Key differences between tax deductions and tax credits 

The biggest difference between tax deductions and tax credits is the way they lower your tax. As we said earlier, tax deductions reduce your taxable income; whereas tax credits directly reduce your tax. That means you’ll get far more value out of a tax credit than a deduction, even if they’re worth the same amount, or the tax credit is worth less than the deduction.  

For example, let’s say you have a $1,000 tax deduction. To calculate the impact of this deduction, you first need to know your tax bracket. If you’re in the 22% tax bracket, you would multiply the $1,000 deduction by 22%, which means you would save $220 in tax. In contrast, a $1,000 tax credit would directly reduce your tax by $1,000, making it more valuable than a deduction of the same amount. 

Another way tax deductions differ from tax credits is how they impact your tax refund. Since deductions lower your taxable income rather than your actual tax, the effect they have on your refund depends on your tax bracket and how much tax you've already paid throughout the year.  

On the other hand, a tax credit directly affects the amount of tax, which means it can have a more predictable and often greater effect on increasing your refund or reducing your tax. Refundable tax credits can make an even bigger difference because they not only reduce your tax to zero but also result in a refund if the credit amount is greater than your tax. 

While tax deductions and credits may work in different ways, both can be valuable tools for lowering your tax and increasing your refund. And the good news is, you can benefit from both. 

Consult a Jackson Hewitt Tax Professional 

While the two types of benefits can be powerful tools for decreasing your tax and increasing your refund, tax deductions and credits can also be all too easy to miss. That’s why you need a little experience on your side.  

Jackson Hewitt Tax Pros work hard to get you every credit, deduction, and dollar you deserve. Best of all, we’re open all year, and ready to help you make a tax plan that works for you.  

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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