As you file federal taxes, deductions and credits can help lower your tax bill — but they do so differently.
Deductions reduce your taxable income by allowing you to subtract certain expenses from your gross income.
Tax credits, on the other hand, directly reduce your tax liability after it has been calculated.
Here’s a closer look at both and how to use them to keep more earnings.
Tax Deductions vs. Tax Credits
Filing federal taxes starts with calculating your gross income, which is the total amount you earned during the year. You subtract any deductions you qualify for to get your taxable income.
Your taxable income is then taxed according to the progressive rates that apply to you based on your filing status and income level. For example, if you’re a single taxpayer with $75,000 in taxable income for 2024, your federal income taxes would be calculated as follows:
— 10% on the first $11,600 = $1,160
— 12% on $11,601 to $47,150 = $4,265.88
— 22% on $47,151 to $75,000 = $6,126.78
[Read: Tax Filing in 2025: How to Choose Your Filing Status]
Total income tax liability: $11,552.66
Once you’ve calculated your tax liability, the final step is to check for tax credits, which directly reduce the amount you owe.
Continuing with the example above, if you qualified for an earned income tax credit (EITC) of $4,213, your tax liability would drop from $11,552.66 to $7,339.66.
Is a Tax Deduction or Tax Credit Better?
Tax deductions and credits can both reduce your tax bill, but all things equal, credits help you save more. For example, here’s how both a $5,000 deduction and a $5,000 credit would impact your tax bill.
| $5,000 Tax Credit | $5,000 Tax Deduction | |
| Gross income | $75,000 | $75,000 |
| Tax deduction | $0 | -$5,000 |
| Taxable income | $75,000 | $70,000 |
| Income tax (single filer) | $11,552 | $10,452 |
| Tax credit | -$5,000 | $0 |
| Tax bill | $6,552 | $10,452 |
The $5,000 deduction reduces the final tax bill only by $1,100, while the credit reduces it by the full $5,000. Credits and deductions, however, aren’t mutually exclusive — you can take advantage of both to maximize your savings.
Refundable vs. Nonrefundable Credits
As you explore tax credits, you’ll come across three types: refundable, partially refundable and nonrefundable. The key difference lies in what happens if your tax liability reaches zero.
— Refundable credit: This can reduce your tax bill below zero, resulting in a refund.
— Nonrefundable credit: You can only lower your tax bill to zero — any unused amount is lost.
— Partially refundable credit: This falls somewhere in the middle, allowing a portion of the credit to be refunded while the rest can only offset taxes owed.
[READ: The Fastest Way to Get Your Tax Refund]
Refundable credits offer the greatest advantage since they can put money back in your pocket. However, any type of credit is valuable when you owe taxes.
Standard vs. Itemized Deductions
When filing federal taxes, you can take the standard deduction or itemize your deductions.
The standard deduction is a fixed amount set by the IRS that you can subtract from your gross income to reduce your taxable income.
On the other hand, itemizing deductions allows you to deduct specific eligible expenses individually. In some cases you can claim the full amount you spent.
For tax year 2024, the standard deduction amounts are as follows:
| Filing Status | 2024 Standard Deduction Amount |
| Single or Married Filing Separately | $14,600 |
| Head of Household | $21,900 |
| Married Filing Jointly or Qualifying Surviving Spouse | $29,200 |
Choosing between standard vs. itemized deductions depends on which method offers you the greatest tax savings.
“Following the Tax Cuts and Jobs Act (TCJA) of 2017, about 90% of filers claim the standard deduction since some itemized deductions were either limited or eliminated, but there are still people who can maximize their deductions by claiming itemized deductions,” Lisa Greene-Lewis, tax expert and spokesperson at TurboTax, said in an email.
Run the numbers to see which option is best for you.
[Read: The Pros and Cons of Standard vs. Itemized Tax Deductions]
Above- vs. Below-the-Line Deductions
You’ll also encounter two types of deductions as you file federal taxes: above-the-line and below-the-line.
Above-the-line deductions are adjustments you can take before calculating your adjusted gross income (AGI) and are available whether you take the standard deduction or itemize. A few examples include:
— Alimony payments
— Business use of your car or home
— Health savings account contributions
— Student loan interest
— Teacher expenses
“Popular above-the-line deductions include IRA and SEP deductions, self-employment deductions and student loan interest,” Armine Alajian, certified public accountant and founder of the Alajian Group in California, said in an email.
Below-the-line deductions are subtracted after calculating your AGI and are only available if you itemize. They include expenses such as:
— Bad debts
— Capital losses
— Donations to charity
— Gambling losses
— Home mortgage interest
Above-the-line deductions are generally more accessible since they can be claimed by all filers, while below-the-line deductions are only available to filers who itemize.
Tips to Lower Your Tax Bill
As you work your way through your taxes, here are a few steps experts recommend you take to make the most out of deductions and credits:
— Review deductions carefully: “Taxpayers should review the tax form carefully to see what deductions apply to them and ensure they have all necessary documents ready,” says Alajian.
— Keep your records organized: “I recommend having all of your receipts for expenses in one place, so you don’t leave anything out,” says Greene-Lewis. She adds that if you’re self-employed, you can also claim all of the expenses directly related to your business.
— Consider strategies like bunching: “Bunching allows taxpayers to combine charitable contributions over several years into one singular year to receive itemized tax deductions for that year while taking the standard deduction in other years, which increases their overall savings,” Adam Nash, CEO and co-founder of Daffy, a California-based platform and community for charitable giving, wrote in an email.
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What’s the Difference Between a Tax Credit and a Tax Deduction? originally appeared on usnews.com
Update 03/31/25: This story was published at an earlier date and has been updated with new information.
