What Is the Difference Between Tax Credit and Tax Deduction?

The information in this article is up to date for tax year 2025 (returns filed in 2026).

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 between a tax credit and tax deduction?

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:

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 2025 Standard Tax Deduction?

The 2025 standard deductions are as follows:

Single or Married Filing Separately: $15,750
Married Filing Jointly or Qualifying Surviving Spouse: $31,500
Head of Household: $23,625

Taxpayers Aged 65 and Older or Blind

These are the 2025 additional standard deduction amounts for taxpayers who are 65 or older or blind.

$2,000 for Single or Head of Household
$1,600 for Married couples or Qualifying Surviving Spouse

Seniors aged 65 and older can also now claim a new $6,000 bonus standard deduction, based on the changes from the One Big Beautiful Bill Act (OBBBA). This temporary deduction will be in place from 2025-2028.

Common Tax Deductions

Here are some common tax deductions:

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!

Let’s File My Taxes

Frequently Asked Questions

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

A tax credit reduces the amount of tax you owe dollar-for-dollar, while a tax deduction lowers your taxable income, which indirectly reduces the tax you owe.

Which is more valuable, a tax credit or a tax deduction?

Generally, tax credits are more valuable because they directly reduce your tax bill, whereas deductions only reduce the portion of income that is taxed.

What are common examples of tax credits?

Common tax credits include the Child Tax Credit, Earned Income Tax Credit (EITC), Child and Dependent Care Credit, and education credits like the American Opportunity Tax Credit.

What are common examples of tax deductions?

Common deductions include mortgage interest, state and local taxes (SALT), charitable contributions, student loan interest, and medical expenses that exceed certain limits.

Can I claim both tax credits and deductions in the same year?

Yes. Taxpayers can claim both as long as they meet the eligibility requirements, which can significantly reduce their overall tax liability.

Are all tax credits refundable?

No. Some credits, like the EITC, are refundable (you can receive money even if you owe no taxes), while others, like the Child Tax Credit, may be partially refundable or non-refundable.

How do tax deductions affect my taxable income?

Deductions lower your taxable income, which reduces the total tax owed based on your tax bracket. Larger deductions can move you into a lower tax bracket and save more.

Can I use tax software to figure out credits and deductions?

Yes. Tax software like ezTaxReturn can help identify all eligible credits and deductions, calculate savings, and ensure your tax return is accurate and optimized.

Do dependents impact my tax credits and deductions?

Yes. Having dependents can qualify you for credits like the Child Tax Credit and Child and Dependent Care Credit and may also influence your filing status and deductions.

Where can I find official IRS guidance on tax credits and deductions?

The IRS provides detailed instructions in Publication 17 and other publications, which explain eligibility, limits, and how to claim both credits and deductions correctly.