The Reference Section

A collection of wealth improvement articles


What is the difference betwee a tax deduction and a tax credit?

Question: What is the difference between a tax deduction and a tax credit?

Answer: A deduction reduces your taxable income, and a credit is a dollar for dollar offset against your computed tax liability. Some credits are refundable, meaning that if your credit is larger than your tax liability, the IRS will pay you the difference.

This example may help. A $100 deduction will reduce your taxes by $24 if you are in the 24% tax bracket. A $100 credit will reduce your taxes by $100.