Tax Credits vs. Tax Deductions: What’s the Difference and Which Saves You More?

When tax season rolls around, many taxpayers ask the same question: How can I lower my tax bill? The answer often comes down to two powerful tax-saving tools: tax credits and tax deductions. While both help reduce the amount you owe to the IRS, they work in different ways.

Understanding the difference between tax credits and tax deductions can help you maximize your savings, avoid overpaying taxes, and ensure you take full advantage of tax laws. In this guide, we’ll break down:

• What tax deductions are and how they work

• What tax credits are and which are refundable vs. nonrefundable

• Which option saves you more money

• Real-life examples of education tax credits and deductions

• How to decide which tax breaks work best for you

If you’re filing taxes in Pittsburgh or anywhere in the U.S., this guide will help you understand which tax-saving strategies can benefit you most.

What is a Tax Deduction?

A tax deduction lowers your taxable income, reducing the amount of income the IRS can tax. However, the actual savings depend on your tax bracket.

Common Tax Deductions for 2024

For the 2024 tax year, here are some of the most commonly used IRS deductions:

1. Standard Deduction

The standard deduction is a fixed amount that most taxpayers can subtract from their taxable income:

• Single: $14,600

• Married Filing Jointly: $29,200

• Head of Household: $21,900

Choosing the standard deduction simplifies tax filing, as you don’t need to track expenses throughout the year.

2. Itemized Deductions

If your deductible expenses exceed the standard deduction, it may be more beneficial to itemize. Here are some common itemized deductions:

• Mortgage interest (reported on Form 1098)

• Medical expenses exceeding 7.5% of adjusted gross income (AGI)

• State and local taxes (SALT) – Property taxes, state income taxes, or sales tax

• Charitable contributions

• Unreimbursed business expenses for self-employed individuals

For many homeowners and high-income earners, itemizing deductions can result in greater tax savings.

What is a Tax Credit?

Unlike deductions, which lower taxable income, tax credits reduce the actual tax you owe—dollar for dollar. This makes them even more powerful than deductions.

For example, if you qualify for a $1,000 tax credit, it directly reduces your tax bill by $1,000, whereas a $1,000 tax deduction only reduces your taxable income (resulting in a smaller tax benefit).

Types of Tax Credits

There are two main types of IRS tax credits:

1. Refundable Tax Credits

These tax credits reduce your tax bill and can provide a refund if the credit amount is higher than the taxes you owe.

Examples of refundable tax credits:

• Earned Income Credit (EIC) – Helps low- to moderate-income taxpayers

• American Opportunity Credit (AOC) – 40% of this education tax credit is refundable

• Additional Child Tax Credit (ACTC) – Provides a refund even if you owe no tax

If you qualify for refundable tax credits, you could receive money back from the IRS—even if you had zero tax liability.

2. Nonrefundable Tax Credits

Nonrefundable credits reduce your tax bill but won’t generate a refund if your tax liability reaches zero.

Examples of nonrefundable tax credits:

• Lifetime Learning Credit (LLC) – Helps students pay for college expenses

• Child and Dependent Care Credit – Covers child or dependent care costs

• Saver’s Credit – Rewards low- to moderate-income taxpayers who contribute to retirement accounts

Which Saves You More: Tax Deductions or Tax Credits?

Let’s compare how tax deductions and tax credits affect your tax bill:

Scenario 1: Using a $1,000 Tax Deduction

Suppose you’re in the 22% tax bracket. A $1,000 deduction reduces your taxable income, saving you $220 in taxes (22% of $1,000).

Scenario 2: Using a $1,000 Tax Credit

A $1,000 tax credit reduces your tax bill directly by $1,000, making it far more valuable than a deduction of the same amount.

Conclusion

Tax credits are generally more beneficial than tax deductions since they offer a dollar-for-dollar reduction in taxes owed. However, maximizing both is the key to lowering your tax bill.

Education Tax Benefits: A Real-Life Example

If you’re paying for higher education, you may qualify for education tax credits and deductions under IRS Publication 970.

1. American Opportunity Credit (AOC)

• Maximum Credit: Up to $2,500 per student

• Refundable Portion: 40% (up to $1,000 refundable)

• Eligibility: Available for the first four years of college

2. Lifetime Learning Credit (LLC)

• Maximum Credit: Up to $2,000 per return

• Refundable? No, it only offsets tax liability

• Eligibility: Available for undergraduate, graduate, and continuing education

If eligible for both, you must choose one per student per year. Generally, the AOC offers higher benefits for undergraduate students.

Final Thoughts: How to Maximize Your Tax Savings

• Tax deductions reduce taxable income and are great for high-income earners or homeowners.

• Tax credits directly reduce your tax bill and often result in bigger savings.

• Refundable tax credits can increase your refund, even if you owe no tax.

• Combining deductions and credits can significantly lower your overall tax liability.

If you’re unsure whether to itemize deductions, take the standard deduction, or claim tax credits, consult a Pittsburgh tax professional. The right strategy depends on your income, expenses, and eligibility for tax breaks.

Pittsburgh Logos Tax and Business Solutions is here to help you navigate tax deductions, credits, and other tax-saving opportunities.