What’s the Difference between a Tax Credit vs. Tax Deduction?

Do you know the difference between a tax credit and a tax deduction?

If so, you may be in the minority compared to most Americans because one of the biggest misunderstandings about taxes is the idea of a tax credit vs. a tax deduction.

They both put your money in your pocket but in vastly different ways. And knowing the difference can help you get a bigger tax refund.

Table of Contents
  1. Tax Credit vs. Tax Deduction
  2. Claim Standard or Itemized Deductions?

🔃Updated January 2023 with the latest figures for tax year 2022. While it is the year 2023, we are preparing our taxes for the previous year so we’ve kept the figures for tax year 2022 to avoid confusion. We also removed mentions of the CARES Act tax changes which no longer apply.

Tax Credit vs. Tax Deduction

Here’s the difference between a tax credit and a tax deduction:

  • A tax credit reduces how much tax you owe to the IRS and is a dollar for dollars reduction in tax liability. The Child Tax Credit is worth up to $2,000 per qualifying child and if you qualify, it will reduce how much you owe on your taxes by $2,000.
  • A tax deduction reduces how much of your income is subject to taxation, and usually only if you itemize your tax deductions. Charitable contributions are tax deductions so if you make a $2,000 donation to a qualifying charity, you reduce your taxable income by $2,000. Your taxes will go down based on your tax bracket. If you’re in the 24% tax bracket, your taxes will be reduced by $480.

In a hypothetical scenario where you could get either a $2,000 tax credit or a $2,000 tax deduction, you want the tax credit. It reduces your tax liability the most.

With tax credits, there’s also another distinction – is the tax credit refundable?

Refundable means that you will get the full value of the credit, even if your tax liability is reduced to below zero. For example, the Child Tax Credit is refundable so even if you owed very little in taxes, and the credit put your tax liability in the “negative,” where the IRS owes you money, you would get all of the credit.

Let’s say you qualify for a $2,000 Child Tax Credit and you owed $1,000, then the IRS would send you $1,000. If the Child Tax Credit were not refundable, you would get nothing.

There’s one more added wrinkle, the Child Tax Credit is partially refundable up to $1,400 per child. So if you qualified for the full $2,000 of credit but you only owed $200 in taxes, you wouldn’t get $1,800 – you would only get $1,400 back.

Claim Standard or Itemized Deductions?

When you file your taxes, you often have to make a big decision – do I claim the standard deduction or should I itemize my deductions?

With a tax credit, you get it no matter what. No decision required.

With a tax deduction, you only get it if you itemize your deductions. When you file your taxes, you can always claim a standard deduction. The standard deduction is meant as a catch-all and you don’t have to do anything extra to get it – everyone can take it.

The amount you can deduct will be based on your filing status for 2022:

If you have a series of deductions that, in total, exceed the standard deduction then you will want to itemize them on a Schedule A. In other words, let’s say you’re a single filer, if you think you have more than $12,980 in total tax deductions, you will have to itemize them to get the full deduction. This also means you have to retain the paperwork and proof, just in case your tax return is audited. No proof required for a standard deduction.

You almost always want to use the method that gets you the highest tax refund (don’t claim the standard deduction because you think you’ll get audited, it’s extremely unlikely) but you can see now why a tax credit is so much better. 🙂

But when it comes down to the numbers – this is why a tax deduction is less attractive than tax credit – you need a sum total of deductions greater than the standard deduction. With a tax credit, you just get it if you qualify.

Some tax deductions are “above-the-line” deductions, which means you can claim them even if you don’t itemize your deductions. One common above the line deduction is if you’re a teacher and pay for some expenses out of pocket, known as “educator expenses.”

Now you know the difference between a tax credit and tax deduction!

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About Jim Wang

Jim Wang is a forty-something father of four who is a frequent contributor to Forbes and Vanguard's Blog. He has also been fortunate to have appeared in the New York Times, Baltimore Sun, Entrepreneur, and Marketplace Money.

Jim has a B.S. in Computer Science and Economics from Carnegie Mellon University, an M.S. in Information Technology - Software Engineering from Carnegie Mellon University, as well as a Masters in Business Administration from Johns Hopkins University. His approach to personal finance is that of an engineer, breaking down complex subjects into bite-sized easily understood concepts that you can use in your daily life.

One of his favorite tools (here's my treasure chest of tools,, everything I use) is Empower Personal Dashboard, which enables him to manage his finances in just 15-minutes each month. They also offer financial planning, such as a Retirement Planning Tool that can tell you if you're on track to retire when you want. It's free.

>> Read more articles by Jim

Opinions expressed here are the author's alone, not those of any bank or financial institution. This content has not been reviewed, approved or otherwise endorsed by any of these entities.

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Cindy
3 years ago

You should check into the Child Tax Credit further, because if you do not owe any taxes, as in your tax liability is 0, then you can only get up to $1,400 of the $2,000 credit.

Susan
3 years ago

Thank you for clarifying this for us.

Bianca
3 years ago

So if we’re claimed as dependents in 2019 but not in 2020 would we get $1200 added to next years tax refund when we file? These stimulus checks seem to leave out a lot college students that depend on themselves.

Bre
3 years ago

I’m a single mother with two kids. I am trying to buy a house. For my payroll tax deductions – I put single with zero dependents for state and federal. I did this hopeful to get a bigger return 2020 to help with me with a down payment. Someone told me that I should be put more dependents. They sai the government could keep all the money instead of refund it. Because of the stimulus check

Ange
3 years ago
Reply to  Jim Wang

They say you have to file taxes if you are on Social Security and you have dependents and you still get nothing back; is my friend doing it right and does she have to file a tax return it is just her and her 3 children?

Mike
3 years ago

I was looking for Clarification. If I’m owed $100 next year in Federal Taxes because I overpaid, would I still get the $100 refund or no because I was already given an advance on my taxes with the $1,200 Stimulus Check?

Jenni L.
3 years ago

So when we file our taxes next year, we will have to add the amount stimulus $ given on a particular line which will then zero out that portion of of refund. I’m guessing that’s how it will work?

Brittany
3 years ago

So basically, if my tax return comes up with a $2400 tax refund, I won’t get any tax refund back in 2020 because it’s been paid out already through the CARES act and if the newer CARES II act (proposed recently) passes? Thanks for the clarification… taxes are confusing!

Dee
3 years ago
Reply to  Jim Wang

I’m not sure if I understand your last reply. If on average I get back 1800. To 2000 in tax refund in a given year I wont get anything because yhey have given the stimulus of 2400?

Carol Sargeant
3 years ago

I understand nothing about what I just read. I don’t make enough money to pay taxes. I am single, 78, with no dependents. Do I get a stimulus check?

Judy A Dust
3 years ago

What about seniors that haven’t had to file any income taxes, will this have to be claimed as income so we have to file a return?

Katrisha
3 years ago

Ok, just want to clarify. So if I normally receive a 5000.00 tax refund every year. This year received 2400.00 in Stimulus Advance checks. Does that advance mean that this year when I file my taxes, I’m only going to get a 2600.00 tax refund because they will deduct the 2400.00 they already gave me?

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