What is the difference between a tax deduction and a tax credit?

Tax deductions and tax credits both reduce your tax bill, but they work very differently. A tax deduction reduces your taxable income. For example, a $10,000 deduction for someone in the 22% tax bracket saves $2,200 in tax ($10,000 x 22%). The value of a deduction depends on your tax bracket: higher-bracket taxpayers save more from the same deduction. A tax credit directly reduces your tax bill dollar-for-dollar. A $2,000 tax credit saves you exactly $2,000, regardless of your tax bracket. Credits are more valuable than deductions of the same amount. Tax credits come in two types: nonrefundable credits (can reduce your tax to zero but not below, no refund for excess) and refundable credits (can reduce your tax below zero, giving you a refund even if you owe no tax). Refundable credits include the Earned Income Tax Credit, Additional Child Tax Credit, and American Opportunity Tax Credit (partially refundable). Common deductions: mortgage interest, state and local taxes (SALT, up to $10,000), charitable contributions, medical expenses (above 7.5% AGI), and business expenses. Common credits: Child Tax Credit, education credits, energy credits, and the Earned Income Tax Credit. When filing unfiled returns, claiming all available credits can dramatically reduce or eliminate a balance.