What is the Difference Between a Tax Credit and a Tax Deduction?

When it comes to preparing your taxes, the prospect of tax credits and tax deductions are music to the ears. That’s because these tools can lower the amount of taxes you owe to the government. 

With the passage of the “One Big Beautiful Bill” Act (OBBBA) in 2025, effective through 2028, several brand-new tax deductions were created for workers and seniors.

While both tax credits and tax deductions are worth getting excited over, it’s important to understand the fundamental differences between them.

What Are Tax Credits?

Simply put, tax credits are reductions on the amount of actual tax you owe. Tax credits in no way affect your tax bracket or taxable income. Instead, think of these as reductions that come after the fact – i.e. after you’ve determined how much is owed to the government. There are a few common types of tax credits that can be given based on your income level, whether or not you have children, if you’re a college student, and more. 

Some of these tax credits include:

• Child Tax Credit
• Child and Dependent Care Tax Credit
• Adoption Tax Credit
• Lifetime Learning Credit
• American Opportunity Tax Credit
• Earned Income Tax Credit
• Saver’s Tax Credit

Tax credits are typically either refundable or non-refundable. The type of credit will affect how much you’ll receive back on your tax refund.

Refundable Tax Credits

Refundable tax credits allow you to be refunded the remaining, unused portion of a credit. This type of tax credit is the more advantageous of the two. 

For example, say you owe $900 in taxes, but your eligible Child Tax Credit is worth $2,000. Not only will this cover the $900 you owe in taxes, but you will also be refunded the remaining $1,100 in cash. It’s important to note that in recent years, certain tax credits (including the Child Tax Credit) have been reformed to include caps on the amount of refundable credit given through the Tax Cuts and Job Act that went into effect in 2018.¹

Non-Refundable Tax Credits

Alternatively, non-refundable tax credits will only cover the amount in taxes you owe, up to the credit’s limit. If there is more in the credit amount than what you owe, you do not receive the excess amount in the form of a tax refund. For example, if you owe $900 in taxes and your tax credit is worth up to $2,000, the $900 will be covered, but you will not receive the additional $1,100 in hand.

What Are Tax Deductions?

Tax deductions are used to reduce the amount of income that is eligible to be taxed. By reducing this amount, your income may fall into a lesser tax bracket, meaning you’re subject to paying a lesser tax percentage. 

There are typically two types of tax deductions: itemized deductions and above-the-line deductions.

Itemized Deductions

You can use itemized deductions to help lower your taxable income. 

Common types of itemized deductions include:

• Charitable donations
• Medical expenses
• Property taxes
• Mortgage interest

While people are welcome to add each deduction up separately on their taxes (i.e. itemize them), most will opt for the standard deduction set by the IRS. 

For the 2026 income tax year, these are the standard deduction amounts:

• Single or married but filing separately: $16,100
• Married and filing jointly or qualifying widow(er): $32,200
• Head of household: $24,150²

There is now an additional "Senior Bonus" deduction of $6,000 for taxpayers over the age of 65, due to the passage of the OBBBA.

It is common to use a standard deduction because, in most cases, an itemized amount won’t exceed the IRS’s standard deduction rates.

Above-the-Line Deductions

Above-the-line deductions are used to reduce your adjusted gross income (AGI), which can qualify you for certain itemized deductions and tax credits. Your adjusted gross income is determined by subtracting above-the-line deductions from your gross income. This lower AGI can then allow you to claim important tax credits or deductions that may be dependent on income level. 

Above-the-line deductions include:

• Tax-Free tips
• Tax-Free overtime
• Alimony paid
• Educator expenses
• Student loan interest
• Deductible IRA contributions
• HSA contributions
• Moving expenses of armed forces members
• Car loan interest

Tax credits and tax deductions can both greatly benefit taxpayers, especially when they work in tandem. Familiarize yourself with the differences between tax credits and deductions, as well as the new tax rules for 2026. This will give you a great place to start researching and understanding what deductions and credits you and your spouse may be eligible for in the upcoming tax year.

If you’re looking for tax filing support, or other forms of financial management, we’d be happy to assist.

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