Tax season 2024: What is the difference between tax deduction and tax credit?

Many Americans are in the process of preparing to file their taxes. The Internal Revenue Service will receive and process tax returns for fiscal year 2023 until April 15, 2024.

Taxpayers can make use of some tools such as tax deductions and credits that could reduce the amount of taxes they need to pay, or increase the amount of their refund.

Although these terms are sometimes used interchangeably, deductions and credits are completely different.

The differences between deduction and tax credit

Under federal tax law, you can deduct some personal expenses or take the standard deduction offered by the IRS. Generally speaking, deductions reduce the amount of taxable income and, therefore, the amount of taxes you need to pay.

On the other hand, tax credits are used to reduce the amount of taxes a taxpayer must pay, as well as to increase their tax refund. Once the tax balance has been calculated, the credits subtract a fixed amount from that number, reducing your tax liability or increasing your refund.

Deduct your expenses and pay less taxes

Taxpayers can choose the standard deduction, which is a predetermined amount of income that they are allowed to deduct from their taxable income without having to itemize their expenses. The standard deduction amounts for tax year 2023 are as follows:

Taxpayers can also choose to itemize their deductions. If your personal deductions exceed the standard deduction amount, you could receive a greater benefit, since you could further reduce your taxable income, placing you in a lower tax rate.

How much taxes do I have to pay? These are the tax rates for fiscal year 2023

Like the amount of the standard deduction, the IRS sets tax rates each year; that is, the percentages of taxes paid based on taxable income. The rate depends on your marital status. For fiscal year 2023, these are the tax percentages to pay: