Often, people mistakenly use the terms “credits” and “deductions” interchangeably. However, at tax time, it’s important to understand the difference between the two, and ensure you’re utilizing them to your advantage. Generally, tax credits are the more beneficial of the two, though when used correctly, both can save you significantly when you file your taxes.


Tax deductions decrease your taxable income amount. If your annual earned income reported at tax time is 70,000, and you’re eligible to claim $15,000 in deductions, you’d only be taxed on $55,000 of your income.  Tax deductions are an excellent way to reduce your tax liability and save money, so be sure you claim as many as you qualify for.


Credits are usually dollar-for-dollar deductions on the amount of taxes that you owe to the IRS. They don’t reduce your income, like deductions do, but instead decrease the amount you must pay once your liability is calculated. If your tax return requires you to pay the IRS $1,500, and you find that you’re eligible to claim a $1,500 tax credit, your tax debt is abolished. You won’t owe anything to the IRS. If you owed $2,000 and claimed the same $1,500 credit, you’d only be responsible for paying $500 (the difference after the credit is subtracted from your balance). There are even some tax credits, like the Earned Income Tax Credit, that are refundable, meaning the IRS may owe you money. Refundable credits allow you to collect the balance of the credit once your tax liability becomes zero.

When filing your tax return, it’s essential to claim all deductions and credit you are eligible to maximize your savings!