A deduction reduces the amount of income you pay taxes on, which means you could pay less in taxes. You subtract deductions from your income before calculating how much taxes you owe. How much a deduction saves you depends on your income tax bracket.<\/p>\n
To calculate how much a deduction could reduce your taxes, you multiply the amount of the deduction by your marginal tax rate. For example, if a deduction is worth $5,000 and you are in the 10% percent tax bracket (the lowest), the deduction would reduce your taxes by $500.<\/p>\n
Because a deduction\u2019s value to you is tied to your tax rate, the higher your tax rate, the more of the deduction\u2019s benefit you can reap. The lower your tax rate, the less benefit a deduction will have for you. So imagine that you take a $5,000 deduction, but you\u2019re in the 35% tax bracket (the second highest). Now you\u2019re saving $1,750 in taxes.<\/p>\n
On the other hand, a credit is a dollar-for-dollar reduction in the amount of tax you owe. For example, if you qualify for a $1,000 tax credit of some kind and owe $5,000 in taxes, that credit will reduce your tax burden to $4,000.<\/p>\n