How tax credits and deductions work
Whether you are an individual taxpayer or you represent a business, tax credits, deductions, and certain investments can change how much tax you owe.
Tax credits are subtracted from the tax you owe. A tax credit is a dollar-for-dollar reduction in your actual tax bill. A few credits are even refundable, which means that if you owe $250 in taxes but qualify for a $1,000 credit, you’ll get a check for $750. (Most tax credits, however, aren’t refundable.)
Tax deductions and investment losses are subtracted from your income before you calculate your tax. A tax deduction is a dollar amount the IRS allows you to subtract from your adjusted gross income (AGI), making your taxable income lower. The lower your taxable income, the lower your tax bill.