Q: Tax deductions and tax credits—what’s the difference, and how can they save me money?

A: Both can lower your taxes, but they work in very different ways.

• A deduction reduces the amount of income that gets taxed.
For example, if you have a $1,000 deduction and your tax rate is 20%, that deduction could save you about $200 in taxes.• A tax credit reduces the tax itself—and generally has a bigger impact.
A $1,000 tax credit can reduce your tax bill by the full $1,000, assuming the credit is fully available to you. That’s why credits are often described as reducing taxes “dollar for dollar.”

• But you don’t get to choose.
Tax law determines whether something qualifies as a deduction, a credit, or neither. For example, certain business expenses and mortgage interest may qualify as deductions, while the Child Tax Credit and certain energy-related incentives are tax credits. Both individuals and businesses may qualify for deductions and credits depending on their circumstances.

Bottom Line: Both deductions and credits can save you money on taxes, but credits generally provide a bigger benefit dollar for dollar. A deduction reduces the income that gets taxed; a credit directly reduces the tax itself.