Difference between a tax deduction and a tax credit

Many people misunderstand the difference between a tax deduction and a tax credit. They think that because they have “write-offs” that it will get them money back. This isn’t always true. Write offs reduce your income which makes your tax bill lower. In short, deductions reduce your tax bill as a percentage of the deduction. For example, a $1,000 deduction may reduce your tax bill or increase your refund by $100. A tax credit is different from a deduction/write off.

Tax credits reduce your tax bill or increase your refund dollar for dollar. A $1,000 tax credit will reduce your tax bill or increase your refund by $1,000. This makes tax credits more favorable than deductions. We want both but there is a big difference.