A deduction reduces the income that is taxed; a credit reduces the tax itself, dollar for dollar. A $1,000 deduction at a 24 percent rate saves $240; a $1,000 credit saves $1,000.
Deduction: lowers taxable income, worth your marginal rate. Credit: lowers tax directly, worth face value, sometimes refundable.
Credits are worth more, and some are refundable, meaning they can produce a refund beyond what you paid in. The distinction explains why the child tax credit matters more than most deductions and why deductions matter more to high earners.
A credit that is paid to you even if it exceeds your tax liability, like the earned income credit and part of the child tax credit. Nonrefundable credits stop at zero tax.
Source: IRC 21 to 54 (credits); IRC 63 (deductions)
Last reviewed September 17, 2026. Tax rules change; confirm current law before acting.
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