There are three different ways you can save money at tax time: by claiming exemptions, credits, and deductions. Oftentimes, taxpayers confuse the three and sometimes think the terms are interchangeable. There is a difference between each of the three, however, and it's important to understand how they work and if you qualify before claiming any exemption, credit, or deduction.
Exemptions and deductions are similar because they work the similarly in reducing your taxable income. In doing so, you lessen the amount you have to pay in taxes. A rough example: A $1,000 deduction for a person in the 10% tax bracket could translate to a $100 in savings at tax time. The same is true for an exemption: $4,000 equates to $400 less.
Where they differ is the requirements for receiving and claiming both deductions and exemptions. There are a bounty full of deductions in the tax world: interest on student loans, job search fees, charity donations, relocation expenses, etc. Exemptions, however, are only available for you, your spouse, and your qualifying dependents. The good thing is that you basically get to take an exemption just for paying taxes.
Credits are completely different. They are a dollar for dollar amount deducted from your tax bill. A $500 credit reduces the amount you have to pay in taxes by $500. There are a variety of credits available, for different reasons, such as low income, electric cars, and energy savings. Keep an eye out for different credits and deductions which can save you money at tax time.