Taxes can be tricky, but understanding tax credits and deductions can help you save money.

A tax deduction lowers your taxable income. A lower taxable income means less money you owe in taxes. It may even help you reduce the tax bracket that you fall within. For more on taxable income and tax brackets read 2024 Basics of Federal Taxes. You can think of a tax deduction like a sale discount off the price of a purchase. Think of a buy $2000 get $200 off deal. There are two types of deductions: deductions for Adjusted Gross Income (AGI)—also called adjustments—and deductions from Adjusted Gross Income (AGI), also called standard deduction or itemized deduction.

A tax credit reduces your tax bill dollar to dollar. A tax credit is like getting a voucher that you can use to pay on tax bill.

Tax Deduction versus Tax Credit

Recall that tax deduction reduces taxable income. Simply put, your taxable income is equal to total income minus any deductions you have (Income – Deductions = Taxable Income).

Let’s say you are in the 24 percent tax bracket and you receive a $100 tax deduction, the actual value of the deduction is $24 (that is $100 x .24). Since a tax credit reduces what you owe dollar-for-dollar, a $100 tax credit reduces your tax liability by $100 (or $100 reduction off your tax burden). Obviously, $100 is better than $24. For this reason, tax credits people tend to prefer a tax credit over a deduction. Tax credits can result in a higher tax return. That’s more money in your bank account.

There are specific tax credits and deductions homeowners, energy, electric vehicles, and low and moderate income earners (EITC). There are also credits deductions that an individual might be able to claim for other things like education or health insurance. For a complete list of individual credits and deductions visit the Internal Revenue Service (IRS) website at www.irs.gov/credits-and-deductions-for-individuals. Deductions and credits are not automatically applied to your taxes. If you qualify for a certain deduction or credit, you must claim it on your federal tax return by itemizing your taxes. When you itemize, you use a special form, Schedule A.

However, a lot of people may choose to take a standard deduction instead of itemizing. A standard deduction is a specific dollar amount that the IRS allows you to subtract from your AGI. Essentially, it is a basic (standard) deduction that anyone can use to lower their tax liability. For 2024, the standard deduction is the following:

• For singles and married filing separately is $14,600.
• For married filing jointly and qualifying widows, the standard deduction is $29,200.
• For the head of household standard deduction is $21,900.

How do you know whether you should itemize or take the standard deduction? When deciding to take the standard deduction or itemize deductions, it is wise to take the one that give you the highest dollar value. For example, if you are single and your standard deduction is $14,600, but the total of all deductions you otherwise qualify for is $16,100, you might prefer itemizing.

More Information

Whether taking standard deduction or itemizing, you may seek help from a professional. For tax preparation assistance the IRS offers free in-person tax assistance with an IRS representative or employee at www.irs.gov/help/irs-face-to-face-saturday-help.  Some nonprofit agencies offer tax preparation assistance for free or at low-cost for individuals.

Understanding the difference between tax deductions and tax credits is key to maximizing savings at tax time. While deductions lower your taxable income, tax credits reduce the dollar amount of taxes your owe. Although tax deductions lower your tax bill, tax credits pay down your tax burden and can mean a larger tax refunds for some people. Whether the credit applies to your home, vehicle, or income level, knowing how to take advantage of tax credits and deductions is a savvy way to keep more money in your bank account.