Tax Income

A tax credit directly reduces the amount of tax you owe. For example, if you owe $1,000 in taxes and qualify for a $200 tax credit, your tax liability is reduced to $800. Tax credits can be refundable or non-refundable, depending on the type.

A tax deduction reduces your taxable income, which in turn reduces the amount of tax you owe. For instance, if your taxable income is $50,000 and you qualify for a $2,000 deduction, your taxable income becomes $48,000. The actual tax savings depend on your tax bracket.

The key difference is in how they impact your tax bill. Tax credits provide a dollar-for-dollar reduction in your tax liability, while tax deductions lower your taxable income, which indirectly reduces your tax bill based on your tax rate.