Deductions reduce the amount of income that is subject to taxes. For example, if your earned income was $65,000 and you claimed $15,000 in deductions, then the IRS would only tax $50,000. This is a great way to save money, and you should claim as many deductions as you are eligible for.
Tax credits take away from the amount you owe the IRS. Unlike deductions, they don’t come off your income, and instead reduce your take liability dollar for dollar. Let’s say you’ve completed your tax return and owe the IRS $2,000. However, you’ve discovered that you’re entitled to claim a $2,000 tax credit. Just like that, your tax debt becomes zero. Once you claim the credit, you’ll be in the clear with the IRS and won’t owe a penny. If you discovered you owe $3,000 and can claim that $2,000 tax credit, you’ll only be responsible to pay $1,000, the difference between what’s owed and the credit. And some credits are refundable, meaning the IRS may owe you! Be sure to check that you’ve claimed all credits and deductions to maximize your tax time savings!