Tax Deduction
A reduction of taxable income. This number is subtracted from your adjusted gross income (AGI) and taxes are owed on the lower number. For 2020 the standard deduction is $24,800. The amount of taxes owed varies on your incoming. Check out Understanding the New (2018) Marginal Tax Bracket for more information and to find out how to estimate how much you owe in federal taxes.
Tax Credit
A reduction in total taxes owed.
Example
Let’s take a look at what the difference between a $1,400 tax deduction and a $1,400 tax credit would look like for a married couple filing jointly.
Before Deduction/Credit:
Adjust Gross Income: $80,000
Income Tax Owed: $6,284
$1,400 Tax Deduction
Income Tax Owed: $6,116
Difference: $168
$1,400 Tax Credit (Child Tax)
Income Tax Owed: $4,884
Difference: $1,400
You will receive $1,232 more for a tax credit than a tax deduction of the same amount.
