Prefer Federal Income Tax Credits Or Deductions?

When it is time to file taxes, some may be confused about the difference between a federal income tax credit and a federal income tax deduction.

A federal income tax credit is something that gives you a credit on the balance of your taxes, meaning you'll receive the full amount in a refund.

A tax deduction is something that reduces the overall amount of taxable income you have. A deduction will reduce the amount you have to pay, and a credit will put money in your pocket. The credit will be used to pay any tax liability you may have after all deductions, and if there is any left over, you will receive it in a refund check.

Which one you prefer is entirely based on your particular tax situation. Some people need more deductions to reduce their taxable income, and some people want credits because they don't have much of any taxable income, or many possible deductions to take. Unless your itemized deductions are greater than the standardized deduction amount, it is usually best to take the standard deduction per person, and look for any credits you qualify for, such as the earned income credit, to get the best possible refund amount.