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WalletPrep worksheet · Taxes

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

Name ____________________ Date __________

Key ideas

  1. A deduction is worth amount times your rate. $1,000 deducted in the 22% bracket saves $220. Higher brackets get more from the same deduction.
  2. A credit is worth its full amount. A $1,000 credit cuts a $3,220 tax bill to $2,220, whatever your bracket.
  3. Refundable credits can pay you money. If a refundable credit is bigger than your tax, the IRS sends you the rest. A nonrefundable credit stops at zero.

Vocabulary

Refundable tax credit
A tax credit that is paid to you as a refund when it is bigger than the tax you owe.
Standard deduction
A flat amount the IRS lets you subtract from your income before tax is figured, if you do not itemize deductions.
Itemized deductions
Specific expenses, like mortgage interest, state and local taxes and charity, that you can list and subtract from income instead of taking the standard deduction.
IRA
Individual retirement account: a tax-advantaged retirement account you open yourself at a bank or brokerage, separate from your job.
Child tax credit
A federal credit of up to $2,200 per child under 17 for 2026, partly refundable.
Earned Income Tax Credit
A refundable federal tax credit for workers with low to moderate earned income, larger for families with children.

Work it out

Rosa is single, earns $45,000 at a clinic and takes the standard deduction. She wants to see what a $1,000 deduction and a $1,000 credit would each do to her tax.

  1. Salary
  2. Standard deduction
  3. Taxable income
  4. Tax from the brackets
  5. A $1,000 credit
  6. Tax with the credit
  7. Tax with a $1,000 deduction instead

Check yourself

  1. You are in the 22% bracket. How much tax does a $2,000 deduction save?

    • A. $2,000
    • B. $440
    • C. $220
    • D. $22

  2. You owe $400 in tax and qualify for a $1,000 refundable credit. What happens?

    • A. You owe $400
    • B. You owe nothing and get nothing back
    • C. You owe nothing and get $600 back
    • D. You get $1,400 back

  3. Which of these is a tax credit?

    • A. The standard deduction
    • B. Student loan interest
    • C. Mortgage interest
    • D. The Earned Income Tax Credit

Your turn

Look at line 16 of last year's Form 1040 (your tax before credits) and the credits on lines 19 and 20. Then use the IRS Interactive Tax Assistant to check two credits you didn't claim, like the EITC or the saver's credit.

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Answer key

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

Work it out

  1. Salary$45,000
  2. Standard deduction− $16,100
  3. Taxable income= $28,900
  4. Tax from the brackets$3,220
  5. A $1,000 credit− $1,000
  6. Tax with the credit= $2,220
  7. Tax with a $1,000 deduction instead$3,100
  1. Her taxable income is $45,000 − $16,100 = $28,900. Tax is 10% of the first $12,400 ($1,240) plus 12% of $16,500 ($1,980), so $3,220.
  2. A $1,000 credit comes straight off the tax: $3,220 − $1,000 = $2,220. She saves $1,000.
  3. A $1,000 deduction lowers taxable income to $27,900 instead. Tax drops to $3,100, so she saves $1,000 × 12% = $120.

Check yourself

  1. B. $440 $2,000 × 22% = $440. A deduction saves its amount times your top tax rate.
  2. C. You owe nothing and get $600 back The credit wipes out the $400 of tax, and because it is refundable, the remaining $1,000 − $400 = $600 comes back to you.
  3. D. The Earned Income Tax Credit The EITC is a refundable credit. The other three are deductions that lower your taxable income.