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.