Tax Credit or Deduction - What's the Difference?

How is a tax credit different from a tax deduction? A tax credit reduces your tax, dollar for dollar - in other words, a $1,000 tax credit actually saves you $1,000 in taxes. By comparison, a tax deduction reduces your taxable income, and therefore, it is only worth the percentage equal to your marginal tax bracket. For instance, if you are in the 25% marginal tax bracket, a $1,000 deduction saves you $250 in tax (.25 x $1,000), which is $750 less than the savings with a $1,000 tax credit. The higher your tax bracket, the more a deduction is worth; but a credit is always worth more than a dollar equivalent deduction.

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