Tax Credits and Deductions

Tax credits and deductions are tools to reduce the amount of tax you owe. Deductions lower your taxable income, meaning you pay taxes on a smaller amount; for example, mortgage interest or charitable donations. Tax credits directly reduce the amount of tax owed dollar-for-dollar, such as the child tax credit or earned income credit. Essentially, deductions change your taxable income, while credits directly lower your tax bill. Both can lead to significant savings, but they work differently: deductions are based on your income, while credits are a direct discount on your taxes.