The information in this article is up to date for tax year 2024 (returns filed in 2025).
Tax credits and tax deductions are arguably the best part of preparing your tax return. They reduce your tax bill and help determine how much your tax liability is–either directly or indirectly.
So, what exactly is the difference?
- Tax Deductions: Tax deductions reduce the amount of your income that is subject to taxation, thereby lowering your taxable income. While they don’t directly reduce the amount of tax you owe, they can significantly lower your overall tax bill by reducing the income that is taxed.
- Tax Credits: Tax credits directly reduce the amount of tax you owe, on a dollar-for-dollar basis.
What is a Tax Credit?
A tax credit provides a direct reduction of your tax bill, which makes it more beneficial than tax deductions in many cases. For instance, if your tax bill is $5,000 and you have a $1,000 credit, your tax liability would drop to $4,000.
Tax credits can be either refundable or non-refundable, which determines how they affect your tax refund.
Refundable Credits
If you have a refundable credit, that means if the credit reduces your tax liability to zero and there’s still credit left over, you can claim that money on your tax refund. For example, let’s say your tax bill is $1,000, and you have a $1,500 refundable credit. The credit would zero out your tax liability and leave you with a $500 tax refund.
Examples of refundable credits:
- Earned Income Tax Credit (EITC)
- Additional Child Tax Credit (ACTC)
Non-refundable Credits
If you have a non-refundable tax credit, any money left over after applying the credit does not go to a refund. So, if you have that same $1,000 tax bill and a $1,500 non-refundable credit, your tax liability would be zero, but you would not receive the excess $500.
Examples of non-refundable credits:
- Lifetime Learning Credit
- Elderly and Disabled Credit
Common Tax Credits
Here are the most common tax credits:
- Child Tax Credit
- Dependent Care Credit
- Earned Income Tax Credit
- American Opportunity Credit
- Lifetime Learning Credit
- Energy Efficient Home Improvement Credit
What is a Tax Deduction?
A tax deduction reduces your taxable income. So, for example, if your income was $100,000 and you had a $30,000 deduction, you would only be taxed on $70,000 for the year.
Unlike tax credits, most tax deductions are non-refundable, meaning they only reduce your taxable income but do not directly provide a refund.
Standard Deduction vs. Itemized Deduction
When filing your taxes, you generally have two options for claiming deductions: the standard deduction or itemized deductions.
- Standard Deduction: The standard deduction is a fixed amount set by the IRS that you can subtract from your adjusted gross income (AGI). It’s a simpler option that doesn’t require you to keep track of specific expenses.
- Itemized Deductions: If you have significant expenses such as medical costs, charitable donations, or mortgage interest, you may benefit from itemizing your deductions. This requires more paperwork, but it can result in a larger tax break if your total deductions exceed the standard deduction.
An estimated 90% of taxpayers claim the standard deduction.
However, taxpayers with large expenses throughout the year (such as medical costs or business expenses) may be able to reduce their taxable income by a larger amount when itemizing.
ezTaxReturn can help you determine if you should take the standard deduction or itemized deductions to receive the biggest refund.
What is the 2024 Standard Tax Deduction?
For the 2024 tax year, the standard deductions are as follows:
- Single or Married Filing Separately: $14,600
- Married Filing Jointly or Qualifying Surviving Spouse: $29,200
- Head of Household: $21,900
Taxpayers Aged 65 and Older or Blind
These are the 2024 additional standard deduction amounts for taxpayers who are 65 or older or blind.
- $1,950 for Single or Head of Household
- $1,550 for Married couples or Qualifying Surviving Spouse
Common Tax Deductions
Here are some common tax deductions:
- Student loan interest payments
- Work-related education expenses
- Health savings account (HSA) and other health plans
- Retirement contributions
- Charitable giving deductions
- State and local tax deductions
- Home office deduction
- Mortgage interest deduction
Ready to maximize your tax savings? File with ezTaxReturn today and let us help you get the biggest possible refund by identifying all the credits and deductions you’re eligible for!
The articles and content published on this blog are provided for informational purposes only. The information presented is not intended to be, and should not be taken as, legal, financial, or professional advice. Readers are advised to seek appropriate professional guidance and conduct their own due diligence before making any decisions based on the information provided.
