sparkle-illustration

Register for a NerdWallet account to access simple tax filing for a $50 flat fee, powered by 

ColumnTax Logo

Tax Credit vs. Tax Deduction

Tax deductions reduce your taxable income, but tax credits reduce your bill dollar for dollar.
Tina Orem
By Tina Orem 
Updated

Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.

Tax credits and tax deductions may be the most satisfying part of preparing your tax return. Both reduce your tax bill but in very different ways.

  • Tax credits directly reduce the amount of tax you owe, giving you a dollar-for-dollar reduction of your tax liability. A tax credit valued at $1,000, for instance, lowers your tax bill by the corresponding $1,000.

  • Tax deductions, on the other hand, reduce how much of your income is subject to taxes. Deductions lower your taxable income by the percentage of your highest federal income tax bracket. So if you fall into the 22% tax bracket, a $1,000 deduction saves you $220.

Tax credit vs. tax deduction example

The example scenario below illustrates the difference between how tax deductions and tax credits work. As you can see, both benefits can lower your taxes owed — but how they are applied differs. Generally, a tax credit can have a larger impact because it reduces your taxes owed instead of reducing the income you'll get taxed on. Still, it's worth learning about both types of benefits when looking for ways to catch a break on your taxes.

$10,000 tax deduction

$10,000 tax credit

Your AGI

$100,000

$100,000

Tax deduction

–$10,000

Taxable income

$90,000

$100,000

Tax rate*

25%

25%

Calculated tax

$22,500

$25,000

Tax credit

–$10,000

Your tax bill

$22,500

$15,000

* Example rate. The U.S. has a progressive tax system.

NerdWalletTaxes Logo

Simple tax filing with a $50 flat fee for every scenario

With NerdWallet Taxes powered by Column Tax, registered NerdWallet members pay one fee, regardless of your tax situation. Plus, you'll get free support from tax experts. Sign up for access today.

for a NerdWallet account

checkmark

Transparent pricing

Hassle-free tax filing* is $50 for all tax situations — no hidden costs or fees.
checkmark

Maximum refund guaranteed

Get every dollar you deserve* when you file with this tax product, powered by Column Tax.
checkmark

Faster filing

File up to 2x faster than traditional options.* Get your refund, and get on with your life.

*guaranteed by Column Tax

illustration

The catch to tax credits

  • Some tax credits are nonrefundable. That means that if you don’t owe a lot in taxes to begin with, you don’t get the full value if the credits take your tax bill below zero. In other words, a $600 tax bill combined with a $1,000 nonrefundable credit doesn’t get you a $400 tax refund check — just a $0 tax bill.

  • Some tax credits are refundable. If you qualify to take refundable tax credits — things such as the earned income tax credit or the child tax credit — the value of the credit goes beyond your tax liability and can result in a refund check.

  • The IRS lays out specific criteria you must meet to qualify for both nonrefundable and refundable credits.

A big decision about tax deductions

There are two types of tax-deduction strategies: taking the standard deduction or itemizing.

The standard deduction

  • The standard deduction is a one-size-fits-all reduction in the amount of your income that’s subject to tax. You don’t have to do anything to qualify for the standard deduction or provide any documentation.

  • You can claim the standard deduction on Form 1040. The amount varies depending on your filing status.

Filing status

2023 standard deduction

Single

$13,850.

Married, filing separately

$13,850.

Married, filing jointly; qualified widow/er

$27,700.

Head of household

$20,800.

NerdWalletTaxes Logo

Simple tax filing with a $50 flat fee for every scenario

With NerdWallet Taxes powered by Column Tax, registered NerdWallet members pay one fee, regardless of your tax situation. Plus, you'll get free support from tax experts. Sign up for access today.

for a NerdWallet account

illustration

Itemizing

  • Itemizing allows you to take advantage of deductions such as home mortgage interest, medical expenses or charitable donations. If together your itemized deductions exceed the value of the standard deduction, you'll want to itemize so you pay less tax. You'll need to use the regular Form 1040 and Schedule A.

  • Taking the standard deduction or itemized deductions is an either/or situation. You can do one or the other, but not both.

  • Just as with tax credits, taking certain deductions requires meeting certain qualifications based on your filing status, current life events and the amount of your income that’s taxable. Be sure you meet IRS criteria to qualify for both tax credits and deductions.

Video preview image
Get more smart money moves – straight to your inbox
Sign up and we’ll send you Nerdy articles about the money topics that matter most to you along with other ways to help you get more from your money.