Q&A – What is the difference between a tax deduction and a tax credit?

What is the difference between a tax deduction and a tax credit?

A tax deduction reduces the amount of your income that is subject to tax. For example, if you earn $80,000, deducting $10,000 of expenses would leave you with $70,000 of taxable income. A tax credit is a dollar-for-dollar reduction in tax liability. So, if the income tax on your $70,000 of taxable income was $13,429, a $5,000 tax credit would reduce your tax liability to $8,429. Certain tax credits are refundable to taxpayers whose tax liabilities are not high enough to absorb the credit.