Tax Credits vs. Tax Deductions: What Are the Differences?

As you file taxes, you may have the opportunity to claim tax credits and deductions.

While both can help lower your tax liability, they do so in different ways. Tax deductions reduce the amount of your income that’s subject to tax, while tax credits directly reduce the amount of tax you owe.

It’s important to keep in mind that credits and deductions may change year over year. For example, the recently passed One Big Beautiful Bill Act (OBBBA) has extended, increased, eliminated, and added several deductions and credits. Some of these changes include the Child Tax Credit and the mortgage interest deduction.  

Read on to learn more about tax credits vs. tax deductions and how they work together to help you save at tax time.

Key takeaways

• Tax credits are subtracted from your overall total tax due, reducing how much you owe. Some tax credits are refundable, while others are not.
• Tax deductions are subtracted from your gross income, reducing your total taxable income.
• Taxpayers typically qualify for a number of both tax credits and deductions, depending on factors like their income, whether they have children, and other circumstances.
• In many cases, tax credits and deductions can be subject to change, or even be eliminated, like the energy-efficient credits recently cut by the One Big Beautiful Bill Act.

What is a tax credit?

Once you know how much you owe in taxes, tax credits allow you to subtract specific amounts directly from your tax bill.

Some credits are fully or partially refundable, meaning they can reduce your tax liability below zero and generate a refund. Others are nonrefundable, meaning they can only bring your tax balance to zero—any extra amount won’t be refunded. In some situations, they can be carried forward to future years. 

Here are some commonly claimed tax credits: 

• Earned Income Tax Credit: A refundable credit of up to $8,046 in 2025 for low- to moderate-income workers and families who meet income eligibility requirements.
• Child Tax Credit: A nonrefundable credit of up to $2,200 per child (under the age of 17) in 2025 for families with qualifying dependents. This credit will increase 1% annually to account for inflation starting in 2026.
• American Opportunity Tax Credit: A partially refundable credit of up to $2,500 in 2025 for eligible students with qualified educational expenses for four years of post-secondary education. If the credit brings your tax liability to zero, 40% of the remaining amount (up to $1,000) can be refunded. 
• Lifetime Learning Credit: A nonrefundable credit of up to $2,000 in 2025 to help cover qualified tuition and related expenses for undergraduate, graduate, and professional degree courses.
• Saver’s Tax Credit: A nonrefundable tax credit of up to $2,000 in 2025 for eligible contributions to an IRA or employer-sponsored retirement plan.

If you’ve previously taken energy-efficient tax credits, it’s important to note that credits for home improvements sunset after 2025 and credits for electric vehicles are only valid on qualifying vehicles purchased by September 30, 2025. Purchases of electric vehicles after September 30, 2025 will no longer qualify for tax credits.

What is a tax deduction?

A tax deduction is an amount you subtract from your gross income to lower your taxable income. When filing an individual tax return, you’ll need to choose between taking the standard deduction or itemizing deductions (more on that below).

Common itemized deductions include:

• Medical and dental expenses: If your medical and dental expenses exceed 7.5% of your adjusted gross income (AGI) this year, you may be able to take this deduction. With this write-off, you can claim expenses paid for yourself, your spouse, and your dependents.
• State and local taxes (SALT): The SALT deduction allows you to write off a portion of state and local taxes. As of July 4, 2025, the cap was raised to $40,000 from $10,000 by the One Big Beautiful Bill Act. This cap will increase 1% each year through 2029. 
• Charitable contributions: You may be able to claim certain donations you’ve made to eligible organizations. While you previously had to itemize deductions to claim this write-off, due to the OBBBA tax policy updates, starting on January 1, 2026, you will be able to deduct charitable contributions of up $1,000 (for single filers) or $2,000 (for those who are married filing jointly), even if you take the standard deduction.
• Mortgage interest: If your loan, property, and circumstances meet the eligibility requirements, you may be able to write off a portion of your mortgage loan interest. For mortgage loans taken out on or after December 16, 2017, you can deduct mortgage interest of up to $750,000. For loans taken before December 16, 2017, you can deduct up to $1 million.
• Casualty and theft losses: If you suffered property damage caused by a sudden, unexpected, or unusual event, you may be able to claim a deduction. How much you can write off is based on whichever is smaller: the property’s tax basis or decrease in fair market value.

New tax deductions established by the OBBBA

In addition to extensions, increases, and other changes to existing write-offs, the OBBBA introduced new temporary deductions for tax years 2025 through 2028, including:

• Car loan interest deduction: You may be able to deduct up to $10,000 per year for interest you’ve paid on your loan. To claim this deduction, your vehicle must be for personal use and meet all requirements, including having final assembly within the US.
• Deduction for tips: If you work a job where you earn tips, you can now write off up to $25,000 for qualified tips from 2025-2028.
• Deduction for overtime: You can now write off up to $12,500 for qualified overtime income from 2025-2028.

Standard deduction or itemized deductions?

The standard deduction is a fixed dollar amount that lowers your taxable income and simplifies tax filing by eliminating the need to itemize deductions. Available to most taxpayers, the deduction amounts are set annually by the IRS and vary based on filing status. 

Let’s look at some hypothetical examples of the standard deduction in action. In 2025, a single filer with an income of $50,000 qualifies for a standard deduction of $15,750, which reduces their taxable income to $34,250.

On the other hand, a head-of-household filer earning $50,000 qualifies for a $23,625 standard deduction, which brings their taxable income down to $27,375.

Unlike the standard deduction, itemizing your deductions allows you to subtract the total of certain individual deductions from your gross income.

To itemize, you list each deduction you qualify for (some may be reduced based on your income), add them up, and subtract the total from your gross income.

If your itemized deductions exceed the standard deduction for your filing status, itemizing may result in a lower tax bill. Otherwise, taking the standard deduction is typically the better option.

If you qualify for the standard deduction, the IRS recommends adding up your itemized deductions and comparing them to your standard deduction to see which route will save you more and reduce your overall tax liability.

Note, there are also deductions that act as adjustments to your income and are not restricted to only those who choose to itemize their deductions. For example, student loan interest and educator expenses can lower your income before the standard or itemized deductions are applied.

The TurboTax standard vs. itemized deduction calculator can help you crunch the numbers.

Tax Credits vs. tax deductions: An example

So how do both deductions and credits work on your return? Let’s look at this example:

Allison is a head of household tax filer who earned a gross income of $75,000 in 2025. Her itemized deductions total $15,000 while her standard deduction is $23,625. Taking the standard deduction brings her taxable income down to $51,375 and resulting in a federal tax liability of $6,165. From there, she qualifies for $5,000 in tax credits, bringing her tax bill down to $1,165.

Gross income	$75,000
Standard deduction	$23,625
Taxable income	$51,375
Taxes due	$6,165
Tax credits	$5,000
Final tax bill	$1,165

Allison’s tax deductions reduced her taxable income while the tax credits directly reduced the taxes she owed. Without either, her tax bill would’ve been $16,500.

Deciding which tax credits and deductions are right for you

The IRS provides a long list of tax credits and deductions that can potentially help you lower your tax liability. The challenging part is identifying everything you can claim and filing the correct paperwork. TurboTax streamlines those steps. 

Kris Druffel, EA, offers a few examples of how this works. “TurboTax will ask if you own a home. Your answer may prompt TurboTax to ask about Form 1098 reporting Home Mortgage Interest, which may be deductible. TurboTax also asks about your dependents and automatically calculates the Child Tax Credit based on that information.”

In general, all you have to do is answer a series of simple questions about your finances for the tax year. We’ll take care of the rest, ensuring you don’t pay more than you should. 

Start your stress-free tax filing with TurboTax today!

FAQs

How often do tax credits and deductions change?

Tax credits and deductions are updated annually, with many adjusted for inflation and others changing due to new legislation.

The OBBBA, which was passed July 4, 2025, is the most recent tax reform that impacted a variety of tax credits and deductions, including the standard deduction, Child Tax Credit, SALT deduction, qualified tip and overtime income deductions, and more.

How do I know if I qualify for tax credits and deductions?

The IRS provides detailed eligibility guidelines for each tax credit and deduction on its website. If that sounds a bit overwhelming, don’t worry. TurboTax makes it easy. Just answer a few simple questions, and we’ll identify the credits and deductions you qualify for—so you don’t miss out on savings.

How can I claim itemized deductions on TurboTax?

You can claim itemized deductions in the Deductions and Credits section of the TurboTax filing process. Additionally, our software helps you determine if the standard deduction or itemized deductions will provide you with the best outcome.

What’s better: a tax credit or a deduction?

Both tax credits and deductions can reduce your tax liability. However, tax credits are typically more impactful because they reduce your tax bill by the face amount of the credit, while deductions reduce the amount of your income that’s taxed. For example, a $2,000 deduction will reduce your tax bill by $240 if you’re in the 12% tax bracket, while a $2,000 credit will reduce it by $2,000.

Should you claim both tax credits and deductions?

If you qualify for both tax credits and deductions, you can and should claim both. Doing so can help to lower your tax bill and potentially increase your refund.