Tax Credits vs Tax Deductions: Examples and Planning
By SimplyCPA · 11 October 2026
On this page (6)
- Deduction: Reduces taxable income, so it saves tax at your marginal rate — a $1,000 deduction saves $220 at 22%.
- Credit: Reduces tax dollar for dollar — a $1,000 credit saves $1,000.
- Refundable vs nonrefundable: Refundable credits (earned income credit, the refundable part of the child tax credit) can create a refund; nonrefundable credits stop at zero tax.
- Main credits: Child tax credit ($2,200 per child for 2025, indexed after), earned income credit (up to $8,231 in 2026), American Opportunity and Lifetime Learning credits, child and dependent care credit (rate up to 50% from 2026), adoption credit.
- Foreign tax credit: US citizens and residents with income taxed in India can usually claim a credit for the Indian tax, avoiding double taxation.
The difference in one example
A taxpayer in the 22% bracket can choose between a $1,000 deduction and a $1,000 credit.
Deduction: taxable income falls by $1,000 → tax falls by $220.
Credit: tax falls by $1,000.
A deduction is worth more to higher-bracket taxpayers; a credit is worth the same to everyone who owes enough tax to use it.
Types of deductions
- Above-the-line (adjustments to income) reduce AGI — and lower AGI can unlock other benefits that phase out with income.
- Below-the-line deductions (standard or itemised, QBI, and the 2025–2028 deductions for tips, overtime, car loan interest and seniors) reduce taxable income but not AGI.
Main individual credits
| Credit | Key amount | Refundable? |
|---|---|---|
| Child tax credit | $2,200 per qualifying child for 2025 (indexed for inflation from 2026); phases out above $200,000 MAGI ($400,000 joint) | Partly (additional child tax credit) |
| Credit for other dependants | $500 | No |
| Earned income credit | Up to $8,231 for three or more children in 2026 | Yes |
| American Opportunity credit | Up to $2,500 per student for the first four years of college | 40% refundable |
| Lifetime Learning credit | 20% of up to $10,000 of expenses ($2,000); phases out at $80,000–$90,000 MAGI ($160,000–$180,000 joint) | No |
| Child and dependent care credit | Up to 50% of expenses from 2026 (limit $3,000 for one person, $6,000 for two or more) | No |
| Adoption credit | Up to $17,670 in 2026, of which up to $5,120 is refundable | Partly |
| Saver's credit | Up to 50% of retirement contributions for lower-income taxpayers | No |
| Foreign tax credit | Up to the US tax on the foreign income | No (carry back 1 year, forward 10) |
The OBBBA ended several clean energy credits: the residential clean energy and energy-efficient home improvement credits for property and expenditures after 2025, and clean vehicle credits for vehicles acquired after September 30, 2025.
Foreign tax credit vs deduction
A US citizen or resident who pays income tax in India on Indian-source income (rent, interest, salary) can usually choose a credit (Form 1116) or an itemised deduction for that tax. The credit is almost always better. It's limited to the US tax attributable to foreign-source income in each category; excess credits carry back one year and forward ten. The US–India tax treaty also sets rules for which country taxes which income first.
Planning with credits and deductions
- Keep AGI below phase-out thresholds — for example, by contributing to a traditional 401(k) — to preserve credits.
- Coordinate education benefits: the same expenses can't be used for both the American Opportunity credit and a tax-free 529 distribution.
- Nonrefundable credits are wasted if tax is already zero — in low-income years, prefer refundable credits or defer deductions.