What's the Difference Between a Tax Credit and a Tax Deduction?

Both tax credits and tax deductions can lower the amount of tax you owe, but they work in very different ways. A tax deduction reduces your taxable income, which means you save only a percentage of the deduction amount depending on your tax bracket. A tax credit, on the other hand, reduces your actual tax bill dollar for dollar, making it more valuable in most cases. For example, a $1,000 deduction might save a person in the 22% bracket $220, while a $1,000 credit saves that same person the full $1,000 regardless of their bracket. Some credits are even refundable, meaning the IRS will send you a refund check if the credit exceeds what you owe.