To answer that question is to define the two words.
Mortgage interest, property tax, and unreimbursed employee expenses are common Itemized Deductions. Or, if you don’t have enough Itemized Deductions, you will get a deduction called the Standard Deduction. When filing a tax return, you generally always get either one of those. The deduction will be subtracted (or deducted) from your gross income and give you your taxable income. To figure out how much a deduction saves you in taxes, multiply the total deduction amount by your marginal tax rate.
Income tax can’t be treated like a game
Common credits are the Child Tax Credit, Earned Income Tax Credit, and the Premium Assistance Tax Credit. Credits are a dollar for dollar decrease of your tax liability, a dollar for dollar increase in your refund, or a combination of these two. That’s why we distinguish between a Refundable Tax Credit and a Non-Refundable Tax Credit; some credits will give you money and some don’t.
If your marginal tax rate is 25%, and you have a deduction of $10,000, you can easily calculate that this deduction saves you $2,500 in taxes ($10,000 x .25 = $2,500). Pretty good. If you have a Child Tax Credit of $1,000, you just saved $1,000 in taxes.
So what’s better? As usual…it depends.
