One of the most common misunderstandings about filing an income tax return is the difference between deductions and credits. Deductions reduce the amount of a taxpayer’s income before tax is calculated. For example, on your individual return, you can either take the standard deduction or itemize deductions if it will reduce your taxable income more. Credits, on the other hand, reduce the actual tax due, dollar-for-dollar, generally making them more valuable than deductions. Some credits, such as the Child Tax Credit, are partially or fully refundable, meaning that if a taxpayer’s bill is less than the amount of the credit, the taxpayer can possibly receive the difference as a refund.
