Tax Credit vs. Deduction

Category: tax

A credit directly reduces the tax bill dollar-for-dollar; a deduction reduces the income that is taxed.

A $1,000 deduction at a 20% tax rate saves you $200. A $1,000 *tax credit* saves you $1,000. Credits are significantly more valuable than deductions, which is why the IRS limits them with strict AGI phase-outs and compliance rules.

Common Examples

• The solar installation provided a generous tax credit, which gave us a much larger immediate return than a standard write-off.
• We prioritize claiming every available tax credit before we even begin evaluating our standard itemized vs. standard deduction options.