Deductions and Credits

Deductions and credits are tools that help reduce your tax bill. A deduction lowers your taxable income, meaning you pay taxes on a smaller amount. For example, if you earn $50,000 and claim a $5,000 deduction, you only pay tax on $45,000. Credits, on the other hand, directly reduce the amount of tax you owe. For instance, if you owe $1,000 in taxes and qualify for a $200 credit, you only pay $800. In short, deductions decrease your taxable income, while credits decrease your actual taxes owed. Both can lead to significant savings.