Tax Terms You Need to Know - Deduction vs Credit

Name: Tax Terms You Need to Know - Deduction vs Credit
Uploaded: 2025-04-10T14:02:19Z
Duration: 1 min 41 s
Description: Chris talks about the differences between deductions and credits on your tax return.

Video Transcript

Hey, this is Chris with Money Burst, and since we are still deep in tax season, I thought I had to come back with our tax term series to help you feel a little more comfortable this year when you file your taxes. Today, I want to dive into two new tax terms. That would be the tax deduction and the tax credit.

So, starting first with the tax deduction. A tax deduction works by lowering the income that you're taxed on. And if this sounds a little confusing, let me give you an example here: so, for example let's say you made $50,000 and you were eligible for a $5,000 tax deduction. What you would do is subtract $5,000 from your $50,000 in income, meaning you would only calculate your taxes on $45,000 worth of earnings, which is pretty nice.

Examples of different things that you can deduct from your income would be things like certain medical expenses, work-related expenses, and mortgage interest. There's a long list that the IRS keeps, so you want to check with them and your accountant. Just make sure you're deducting the things that you actually can from your tax return.

Now, in contrast to the tax deduction, we have the tax credit. And a tax credit directly reduces the amount that you owe in taxes. So, this will be after you've already figured out how much you made for the year. You've already taken any types of deductions that you're eligible for, and now you know how much you owe in taxes. A tax credit will then go in and then directly affect that number. And in some cases, depending on the type of tax credit, if you, for example, don't owe anything in taxes? That credit can be refundable to you, meaning that that money can come directly back to you in a tax refund. Some examples of tax credits would be things like the earned income tax credit, and there are different types of education tax credits.

But the thing to remember that differentiates the tax deduction from the tax credit is that tax deductions reduce your income whereas tax credits directly reduce the amount you owe in taxes.