Credits and deductions are two ways you can receive money back from the IRS on your taxes. A tax deduction is a reduction in taxable income that lowers your bill in a percentage format, dependent on your tax bracket. These deductions are broken into broad categories such as medical expenses, state & local taxes, property taxes, mortgage interest, and charitable donations. The IRS does have a standard deduction that is adjusted each year for inflation and varies by your filing status. To get a standard deduction you do not have to itemize your tax return like you would to be eligible for any other tax deductions.
Tax credits are direct reductions of the taxes you are due to pay. The good thing about tax credits is that they are in a dollar for dollar format instead of using the percentages used in deductions. There are several different types of tax credits that you may be eligible for- the best way to discover those is by using a tax professional. Tax credits do not require an itemized tax return like some of the tax deductions.
While both deductions and credits are both helpful during tax season if you have the option tax credits are generally a better choice. Because credits are a dollar value instead of a percentage you stand a better chance at getting more of a break on your taxes. Credits also do not require the work of itemizing your tax return. These are general statements that do not apply to everyone, for that reason you should speak to a tax professional on your best approach.
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