Tax Credits vs. Deductions
01.Deductions Reduce Taxable Income
A tax deduction lowers the amount of your income that is subject to tax. For example, if you earn $50,000 and take a $10,000 deduction, you are only taxed on $40,000.
02.Credits are Direct Dollar Discounts
A tax credit is much more powerful. It reduces your actual tax bill dollar-for-dollar. If you owe $3,000 in taxes and have a $2,000 Child Tax Credit, your final bill drops to $1,000. Some credits are refundable, meaning the government will send you a check for the difference if your tax bill drops below zero!
03.Immigrant Eligibility
Some tax credits require an SSN for the child or filer, while others are available to ITIN holders. Work with a certified professional to understand which credits you qualify for.