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.
Some tax credits are subtracted from the tax you owe. A tax credit can be 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. (However, most tax credits 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 you to subtract from your adjusted gross income (AGI), making your taxable income lower. The lower your taxable income, the lower your tax bill.
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