The purpose of this disclosure is to explain how we make money without charging you for our content.
Our mission is to help people at any stage of life make smart financial decisions through research, reporting, reviews, recommendations, and tools.
Earning your trust is essential to our success, and we believe transparency is critical to creating that trust. To that end, you should know that many or all of the companies featured here are partners who advertise with us.
Our content is free because our partners pay us a referral fee if you click on links or call any of the phone numbers on our site. If you choose to interact with the content on our site, we will likely receive compensation. If you don't, we will not be compensated. Ultimately the choice is yours.
Opinions are our own and our editors and staff writers are instructed to maintain editorial integrity, but compensation along with in-depth research will determine where, how, and in what order they appear on the page.
To find out more about our editorial process and how we make money, click here.
What’s the difference between a tax deduction and a tax credit? Good question. The way these two words are thrown around, many people think they’re synonyms. While both save you money on taxes, however, a $100 credit and a $100 deduction are not worth the same amount to you, says Lisa Greene-Lewis, CPA at TurboTax.
In the hierarchy of tax breaks, credits give you more bang for your buck than deductions, since a credit is a dollar-for-dollar reduction of the taxes you owe. So a $100 credit means you pay $100 less in taxes. The biggest categories for credits include children (and childcare), education and energy efficiency.
A deduction, on the other hand, reduces the adjusted gross income on which you are taxed. You calculate the worth of your deduction by multiplying your marginal (or top) tax rate by the amount of the deduction. So, if you’re in the 25% tax bracket, a $100 deduction means you’ll pay $25 less in taxes (0.25 times $100). Deductions don’t pack quite the same punch as credits, but there are more deductions available—and they do add up.
Deductions generally come in two varieties: There are so-called “above-the-line” deductions available even if you take the standard deduction ($6,200 for single people and $12,400 for married people in 2014, regardless of income) which anyone can take unless you’re subject to the AMT, says St. Louis CPA Douglas Mueller. These include student loan interest, contributions to your retirement account, and job-related moving expenses, to name a few. Other deductions are only available to those who itemize, rather than taking the standard deduction If you pay a lot in mortgage interest, state taxes or self-employment costs, among others, itemizing usually makes sense, says Mueller.
Read next: How Can I Reduce My Tax Bill?