TaxWrenTax glossary · Updated
Tax credit vs. tax deduction
Short answer
A deduction lowers the income that is taxed, so it saves your tax rate times the amount; a credit lowers the tax itself, dollar for dollar. At a 22% rate, a $1,000 deduction saves $220 and a $1,000 credit saves $1,000.
Both lower your tax bill, but at different steps. A deduction is subtracted from your income before the tax is figured, so it reduces taxable income. A credit is subtracted from the tax itself.
Same $1,000, different savings
A single filer with $60,000 of wages in 2026 has $43,900 of taxable income after the standard deduction and $5,020 of federal income tax.
| Tax | Saved | |
|---|---|---|
| No deduction or credit | $5,020 | — |
| $1,000 deduction | $4,900 | $120 |
| $1,000 credit | $4,020 | $1,000 |
The deduction saves 12% of its amount because that is this filer's marginal rate. The same $1,000 deduction is worth $100, $120 or $370 at the 10%, 12% and 37% brackets.
Refundable vs. nonrefundable credits
- Nonrefundable credits can bring your tax down to zero but not below: the $500 credit for other dependents is one.
- Refundable credits are paid to you even beyond your tax, as part of your refund: the earned income credit is fully refundable.
- Partly refundable: the child tax credit is $2,200 per child in 2026, of which up to $1,700 can be refunded.
You claim refundable credits only by filing a return, even if your income is too low to require one.
Common deductions and credits
| Deductions (lower taxable income) | Credits (lower the tax) |
|---|---|
| Standard deduction ($16,100 single) or itemized deductions | Child tax credit (up to $2,200 per child) |
| IRA and HSA contributions, student loan interest (adjustments) | Earned income credit |
| Qualified business income deduction | Education credits (American opportunity, lifetime learning) |
| Senior deduction and the deductions for tips and overtime | Premium tax credit for Marketplace health insurance |
Work it out
Related terms
- Tax credit
- An amount subtracted directly from your tax, dollar for dollar. A $1,000 credit cuts your tax by $1,000, while a $1,000 deduction only lowers the income that is taxed.
- Refundable tax credit
- A credit paid to you even when it is larger than your tax, as part of your refund. A nonrefundable credit can only bring your tax down to zero.
- Standard deduction
- A fixed amount that reduces your taxable income when you don't itemize: $16,100 for single filers, $32,200 for married couples filing jointly and $24,150 for heads of household in 2026, more if you are 65 or older or blind.
Frequently asked questions
Is a tax credit better than a deduction?
For the same amount, yes. A credit reduces your tax dollar for dollar, while a deduction saves only your tax rate on that amount: $1,000 of deduction saves $120 for a single filer with $60,000 of wages in 2026, against $1,000 for a credit.
What is a refundable tax credit?
One you can receive as a refund even when it is larger than your tax. The earned income credit is refundable; of the $2,200 child tax credit, up to $1,700 per child is refundable for 2026. The $500 credit for other dependents is not.
Are deductions worth more for high earners?
Yes: a deduction saves your marginal rate, from 10% in the lowest bracket to 37% in the top one, so $1,000 of deduction is worth $100 to $370. A credit is worth the same to everyone who can use it, though many credits phase out at higher incomes.
What are common tax credits and deductions?
Credits: the child tax credit, the earned income credit, education credits and the premium tax credit. Deductions: the standard deduction or itemized deductions, IRA and HSA contributions, student loan interest and the qualified business income deduction.
Sources: IRS, Credits and deductions for individuals; IRS, Child Tax Credit (qualifying child tests, SSN rules, credit for other dependents). Figures come from our tax data files; see the methodology. All terms: tax glossary.