Tax Season 2025: The crucial difference between tax deductions and tax credits

The IRS has begun processing returns for fiscal year 2023, and submitting early places you at the front of the queue to get your refund. Filers have until April 15 to turn in their tax return, and most of them are expected to receive a refund. You can save thousands of dollars by taking advantage of the various deductions and tax credits available to filers. Although sometimes referred to interchangeably, deductions and credits are two different things.

Tax deductions allow filers to reduce their eligible income before calculating their tax liability. This means that reducing the amount of qualifying income can help reduce the amount of tax that one is required to pay. For instance, out-of-pocket expenses for charity work can be claimed as tax-deductible, saving some money.

On the other hand, tax credits are used to reduce the eventual tax liability. Once the tax balance has been calculated, credits subtract a set dollar amount from the outstanding balance, which either reduces the bill or increases the refund. One of the most notable examples of tax credits relates to electric cars. For instance, people who purchase a new plug-in electric vehicle (EV) or fuel cell vehicle (FCV) from 2023 onwards can claim a tax credit worth up to $7,500.

READ ALSO: How much do the richest 1% in the USA pay in taxes per year?

What are the standard deduction thresholds?

The standard deduction threshold refers to the portion of your total income that is exempted from taxation. This initial portion of your income is not liable to be taxed and is deducted from your overall income to determine the taxable amount. Each year, to keep up with inflation, the IRS issues an adjustment to the standard deduction thresholds. This year the standard deduction offered by the IRS for each of the tax filing statuses looks like this:

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Unlike other deductions, the standard deduction does not need to be justified with any supporting documentation. You simply cite it in your tax return and wipe off the relevant amount from your liable income.

Which is better?

Tax credits are considered more beneficial than deductions because credits directly reduce the amount of tax you owe by a dollar-for-dollar amount, while deductions only lower the amount of income that is subject to tax. Additionally, if the credits are larger than the amount of tax you owe, you may receive a refund for the difference after your tax return has been processed.