Tax deductions versus tax credits
We're focusing on tax deductions in this article, but it's important to point out the basic difference between deductions and credits. In a nutshell, tax deductions reduce your taxable income. If you have a $100,000 gross income and $20,000 in available tax deductions, it will reduce your taxable income to $80,000, and the federal tax brackets would then be applied to this amount.
On the other hand, a tax credit reduces the amount of tax you owe, dollar-for-dollar. Let's say you're single with a taxable income of $80,000. According to the 2023 tax brackets, this would result in a federal income tax of $12,908. However, if you had $3,000 in tax credits, the amount you owe would be reduced to $9,908.