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What’s the difference between a tax deduction and a tax credit?

A tax deduction reduces the amount of income subject to tax, while a tax credit is a dollar-for-dollar reduction in tax liability.

A tax credit is generally more valuable than a tax deduction of the same amount. For example, a $1,000 tax deduction claimed by a taxpayer whose marginal tax bracket is 25% saves the taxpayer $250 ($1,000 × 25%) of tax. On the other hand, a $1,000 credit would shave $1,000 off the same taxpayer’s tax liability. Note that certain credits are “refundable” to taxpayers whose tax liabilities are not high enough to absorb the credit.

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