Tax Deductions vs. Tax Credits | Financial Aid Office | SIU

Tax Deductions vs. Tax Credits

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Tax Credits

Direct reduction of the tax due
Some can be refundable and some can not
Major tax credits include
- Earned income credit (EIC)
- “Make Work Pay” credit
- Lifetime learning credit
- Saver’s tax credit
- Green energy tax credit

Refundable Tax Credits

Non-Refundable Tax Credits

The credit can’t be used to increase your tax refund
Cannot be used to create a tax refund when you wouldn't’t have one already
Savings can’t exceed the amount of tax owed
Subtracted from income tax liability, up to the total amount owed
Cannot reduce your tax balance beyond zero
- Adoption Tax Credit
- Child Tax Credit
- Foreign Tax Credit
- Mortgage Interest Tax Credit

Tax Deductions

A deduction from your income that comes from various expenses incurred by a taxpayer
Lower your taxable income
- Taxable income - (minus) total deductions = (equals) total tax bill for year
Calculated using marginal tax bracket
Can be used to entice taxpayers to participate in programs that have societal benefits

There are two different types of tax deductions: standard and itemized. Each type of deduction has different benefits and qualifiers. Take a look at the table below to compare some of the major differences between standard and itemized deductions.

Tax deductions
Standard	Itemized
Can be claimed on IRS Tax Form 1040, 1040A or 1040EZ	Can be claimed on IRS Tax Form 1040 only
Dollar amount that reduces your taxable income	May offer more benefits than standard deductions
Based on your filing status	Can be used if you don’t qualify for standard deductions
Subtracted from your Adjusted Gross Income (AGI)	If your AGI exceeds a certain level, a portion of itemized deductions is not permitted
	Some deductions have a minimum