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Deductions vs Credits for Families

  1. Warm-up
  2. Story
  3. Learn
  4. Play
  5. Quiz
  6. Remember
  7. Try it
  8. Finish

About this lesson

About 15 minutes · 5 quiz questions

The big idea: A deduction lowers the income you’re taxed on. A credit cuts the tax itself, dollar for dollar.

Lesson outline

The big idea: A deduction lowers the income you’re taxed on. A credit cuts the tax itself, dollar for dollar.

The story: Ana and Marcus sort the tax papers

Ana and Marcus sit at a kitchen table with tax papers, weighing a tax credit against a tax deduction on a scale.

  1. Narrator: It’s tax season. Ana and Marcus are sorting papers at the kitchen table.
  2. Ana: This one says a $2,000 credit. That one says a $2,000 deduction. Same thing, right?
  3. Narrator: Not quite. A deduction lowers the income that gets taxed. A credit comes straight off the tax bill.
  4. Marcus: So the deduction saves our top rate times $2,000, and the credit saves the whole $2,000?
  5. Narrator: Yes. And some credits are refundable: they can pay you money even after your tax reaches zero.
  6. Ana: Then let’s check which credits we qualify for every year. Our family keeps changing.
  7. Narrator: Credits cut tax. Deductions cut taxed income.

What you’ll learn

  1. A deduction: less income gets taxed

    A deduction lowers your taxable income, so it saves tax at your top rate. The same deduction is worth more to someone in a higher bracket. Most people take the standard deduction, which is $32,200 for a married couple filing jointly.

    Example: a $2,500 deduction saves $250 at a 10% top rate and $500 at a 20% top rate.

  2. A credit: less tax, dollar for dollar

    A credit comes straight off your tax bill. A $2,000 credit cuts tax by $2,000, whatever your bracket. That’s why a credit is usually worth more than a deduction of the same size. Many family credits are for kids, childcare, school and working families.

  3. Refundable or not

    A non-refundable credit can lower your tax to zero, but no further. A refundable credit can pay you the rest as a refund, even if you owed little or no tax. Some family credits are fully or partly refundable, so families with low tax bills still benefit.

  4. Itemize, or take the standard deduction?

    You take the standard deduction or add up itemized ones, like mortgage interest, state and local taxes and gifts to charity. Pick whichever is bigger. Some savings, like traditional IRA or HSA deposits, can lower taxable income either way. Rules change, so check each year.

Key words

deduction
an amount that lowers the income you pay tax on
credit
an amount that comes straight off your tax bill
Also called: tax credit
refundable credit
a credit that can pay you money even after your tax reaches zero
itemize
add up your own deductions instead of taking the standard deduction
Also called: itemized deductions

Common questions

Where can I get free help filing?
The IRS runs free tax help for people under an income limit and for many older adults. The fact card links to it.
Do I need receipts to itemize?
Yes. Keep records for anything you itemize, like mortgage interest statements and charity receipts.

Remember this

Credits cut tax. Deductions cut taxed income.

Try it: Save this card for tax season

  1. Bookmark or print this lesson for tax season.
  2. At tax time, list the credits your family might qualify for.
  3. Compare your itemized deductions with the standard deduction.

No account needed: bookmark or print this lesson for tax season.

Live facts

Numbers that change over time, with when they were last checked and where they come from.

Builds on

Lessons teach how money works. They are not financial advice.