Tax Planning
Tax Deductions vs Tax Credits: What Is the Difference?
Understand why a deduction and a credit do not reduce tax in the same way.
The words deduction and credit are often used interchangeably in casual conversation, but they do different jobs on a tax return.
What a deduction does
A deduction generally reduces an income amount used in the tax calculation. The tax effect therefore depends on the surrounding tax calculation and the taxpayer's circumstances.
What a tax credit does
A credit generally reduces tax calculated, subject to the rules for that credit. Some credits are refundable and some are not.
Why records still matter
Whether an item is a deduction or a credit, eligibility and supporting documentation matter. Keep the documents that explain the amount and the facts behind the claim.