Originally Posted by johnross56
Difference between Tax Credits and Tax Deductions?
From a practical perspective, both tax credits and deductions reduce your tax. The difference between credits and tax deductions centers around their process, not their effect. A tax credit reduces the income tax you pay, while a deduction reduces the amount of your income that is subject to income tax. Examples of credits include the American Opportunity Credit, Hope Credit and Lifetime Learning Credit, while examples of deductions include the tuition and fees deduction, student loan and interest deduction, and deductions of medical expenses to name a few. Tax credits are often viewed as being more beneficial than tax deductions of a similar value since credits reduce the tax directly while deductions only reduce the taxable income amount. A deduction shaves money off your taxable income, so the value depends on your tax bracket. If you're in the 25% bracket, a $1,000 deduction lowers your tax bill by $250. But a $1,000 credit lowers the bill by the full $1,000, no matter in which bracket you are. Reducing the taxable income amount means that the actual reduction isn't as great as the credit allowance and thus, it isn't as valuable as a tax credit. Taxpayers are only allowed to claim those credits and deductions for which they are eligible.