Taxes often confuse people because similar-sounding terms — “deduction” and “credit” — behave very differently. A deduction reduces the amount of income that is subject to tax (for example, a $1,000 deduction lowers taxable income by $1,000, which then reduces tax owed by the taxpayer’s marginal rate), whereas a tax credit reduces the tax bill dollar-for-dollar (a $1,000 credit reduces tax owed by $1,000). Because of that structural difference, credits tend to be more powerful per dollar than deductions. There are also refundable and nonrefundable credits — refundable credits can lead to a refund if the credit exceeds the tax owed — but I avoid jurisdiction-specific legal detail here. The main practical point is that a credit gives a direct reduction of the tax liability and is often the preferred form of tax benefit when available.

When people hear “deduction” and “credit” used interchangeably, they overestimate the benefit they’ll receive from certain actions. For example, a $2,000 deduction might only save $300–$600 in tax depending on the taxpayer’s rate, while a $2,000 credit saves $2,000 in tax owed. That’s why tax credits for education or energy-efficient purchases can look particularly attractive. In personal planning terms, don’t assume that two dollar-denominated tax incentives are equal: check whether they’re credits or deductions and whether they’re refundable. Also note there are phase-outs, eligibility rules, and timing considerations, so the practical step is to verify the exact mechanics for a given incentive rather than assume equal value across types.