Think of tax credits and deductions as two different ways to lower your taxes, but they work very differently. Let's break down how each one helps you save money.

Tax Credits: A Dollar-for-Dollar Reduction

Imagine you owe $1,000 in taxes and get a $200 tax credit. That credit reduces your tax bill directly to $800. It's like having a $200 gift card to pay your taxes - it takes $200 right off the top.

Some common tax credits include:

• Child Tax Credit ($2,000 per qualifying child)
• Child and Dependent Care Credit
• Earned Income Tax Credit
• American Opportunity Credit for education
• Clean energy credits for your home

Tax Deductions: Reducing Your Taxable Income

Deductions work differently. Instead of reducing your tax bill directly, they lower the amount of income you're taxed on. If you're in the 22% tax bracket, a $1,000 deduction saves you $220 on your taxes (22% of $1,000).

Common deductions include:

• Mortgage interest
• Charitable donations
• State and local taxes (up to $10,000)
• Student loan interest
• Business expenses

Why Credits Are Usually Better

Let's say you have a choice between a $1,000 credit or a $1,000 deduction.

With the credit, you save $1,000 no matter what tax bracket you're in.