What Is the Difference Between a Tax Credit and a Tax Deduction?

Both can reduce your tax bill, but a credit is more valuable

Sandra Block,

AARP

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Published February 06, 2026

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Many people mistakenly use the terms “tax credits” and “tax deductions” interchangeably, though they differ in many ways.

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Over the years you’ve probably heard about tax credits and deductions that can reduce your tax bill — or plump up your refund. Some of these tax breaks are specifically targeted at older adults.

However, many people mistakenly use the terms “tax credits” and “tax deductions” interchangeably, though they differ in significant ways.

What is a tax credit?

A tax credit provides a dollar-for-dollar reduction to your tax bill. For example, if you owe the IRS $500 and you’re eligible for a $300 tax credit, your tax bill will be reduced to $200.

There are two types of tax credits: nonrefundable and refundable. A nonrefundable credit won’t reduce your tax bill by more than you owe. For instance, if you owe $500 in federal taxes and you’re eligible for a credit worth $600, the amount of the credit will be $500 and will reduce your tax bill to zero — you don’t get to pocket the extra $100. The Child Tax Credit and the Dependent Care Tax Credit, which are available to parents of dependent children under 17, are examples of nonrefundable tax credits.

By contrast, a refundable tax credit can turn a tax bill into a tax refund, or turn a refund into a bigger refund. Let’s say you owe $100 in taxes but qualify for a $500 refundable credit. You’d receive a $400 refund from the IRS. The most common refundable tax credit is the Earned Income Tax Credit (EITC), which helps low- and moderate-income workers. For tax year 2026 — that is, the tax return that you file in 2027 — the maximum EITC for parents with three or more qualifying children is $8,231.

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Some tax credits are partially refundable. For example, if you adopt a child in 2026, you can claim a tax credit of up to $17,670 for eligible expenses, and up to $5,120 of the credit is refundable. Another example of a partially refundable credit is the American Opportunity Tax Credit, which is designed to offset the cost of higher education. Parents and others who qualify for this credit can claim up to $2,500 per eligible student, of which 40 percent — or $1,000 — is refundable.

What is a tax deduction?

A tax deduction is less valuable than a credit because it only reduces your taxable income by the amount of the deduction. For example, if you’re in the 12 percent tax bracket, a $1,000 deduction will not reduce your tax bill by $1,000, but by $120.

You must itemize your taxes to claim many money-saving deductions, such as the deduction for interest on your home mortgage.

Most taxpayers claim the standard deduction, which for the 2026 tax year is $16,100 if you’re single or $32,200 if you’re married and file jointly. Adults 65 and older are eligible to claim an additional standard deduction of $2,050 for single filers or $1,650 for joint filers, plus a new deduction of up to $6,000 per qualifying taxpayer, depending on your modified adjusted gross income (MAGI) — your total adjusted gross income, plus certain tax-free income for people living out of the country. Eligible taxpayers can claim the new deduction whether they take the standard deduction or itemize on their return.

That’s not the only tax deduction available to tax filers who don’t itemize.

Depending on your income, you might be able to deduct contributions to a traditional IRA — potentially up to $7,500 if you’re under age 50 (or $8,600 if you’re 50 or older), even if you claim the standard deduction. Other deductions for non-itemizers include up to $4,400 in contributions to a health savings account ($8,750 for a family plan) and up to $2,500 in student loan interest.

There’s also a new tax deduction from the One Big, Beautiful Bill for certain automobile buyers. If you took out a loan in 2025 to purchase a new car, minivan, van, SUV, pickup truck or motorcycle, you might be able to deduct up to $10,000 of interest paid during the year. To qualify, the vehicle’s final assembly must have taken place in the U.S., and it must weigh less than 14,000 pounds. (To find out where your car was assembled, enter the vehicle identification number into the National Highway Traffic Safety Administration’s VIN decoder. The assembly location will be listed in the “Other Information” section.)

You don’t have to itemize to claim the new car loan interest deduction, but it gradually phases out based on your income. Once your MAGI surpasses $100,000 ($200,000 for joint filers), the deduction is reduced by $200 for every $1,000 (or portion thereof) over the applicable threshold. You’re no longer eligible for the deduction if you paid $10,000 in interest for the year and your MAGI is $150,000 or more ($250,000 or more for joint filers).

Above-the-line deductions, such as the new car loan interest deduction, reduce your adjusted gross income, which is the amount of your total (or gross) income, minus certain adjustments, before you take the standard or itemized deduction. Reducing your AGI can also lower — or potentially eliminate — taxes on your Social Security benefits, because those taxes are based on your combined income, which consists of your AGI, tax-exempt interest income and half of your annual Social Security benefits.

The bottom line

Tax credits are more valuable than deductions, particularly refundable ones, but every tax break matters. And even if you don’t itemize, you may qualify for above-the-line deductions that could provide a modest payback when you file your return.

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Sandra Block has covered personal finance for more than two decades. She was a senior editor at Kiplinger Personal Finance and a reporter for USA TODAY. She is the coauthor of The Busy Family’s Guide to Money and Easy Ways to Lower Your Taxes: Simple Strategies Every Taxpayer Should Know.