Do you know the difference between a tax credit and a tax deduction?
If so, you may be in the minority compared to most Americans because one of the biggest misunderstandings about taxes is the idea of a tax credit vs. a tax deduction.
They both put your money in your pocket but in vastly different ways. And knowing the difference can help you get a bigger tax refund.
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🔃Updated January 2023 with the latest figures for tax year 2022. While it is the year 2023, we are preparing our taxes for the previous year so we’ve kept the figures for tax year 2022 to avoid confusion. We also removed mentions of the CARES Act tax changes which no longer apply.
Tax Credit vs. Tax Deduction
Here’s the difference between a tax credit and a tax deduction:
- A tax credit reduces how much tax you owe to the IRS and is a dollar for dollars reduction in tax liability. The Child Tax Credit is worth up to $2,000 per qualifying child and if you qualify, it will reduce how much you owe on your taxes by $2,000.
- A tax deduction reduces how much of your income is subject to taxation, and usually only if you itemize your tax deductions. Charitable contributions are tax deductions so if you make a $2,000 donation to a qualifying charity, you reduce your taxable income by $2,000. Your taxes will go down based on your tax bracket. If you’re in the 24% tax bracket, your taxes will be reduced by $480.
In a hypothetical scenario where you could get either a $2,000 tax credit or a $2,000 tax deduction, you want the tax credit. It reduces your tax liability the most.
With tax credits, there’s also another distinction – is the tax credit refundable?
Refundable means that you will get the full value of the credit, even if your tax liability is reduced to below zero. For example, the Child Tax Credit is refundable so even if you owed very little in taxes, and the credit put your tax liability in the “negative,” where the IRS owes you money, you would get all of the credit.
Let’s say you qualify for a $2,000 Child Tax Credit and you owed $1,000, then the IRS would send you $1,000. If the Child Tax Credit were not refundable, you would get nothing.
There’s one more added wrinkle, the Child Tax Credit is partially refundable up to $1,400 per child. So if you qualified for the full $2,000 of credit but you only owed $200 in taxes, you wouldn’t get $1,800 – you would only get $1,400 back.
Claim Standard or Itemized Deductions?
When you file your taxes, you often have to make a big decision – do I claim the standard deduction or should I itemize my deductions?
With a tax credit, you get it no matter what. No decision required.
With a tax deduction, you only get it if you itemize your deductions. When you file your taxes, you can always claim a standard deduction. The standard deduction is meant as a catch-all and you don’t have to do anything extra to get it – everyone can take it.
The amount you can deduct will be based on your filing status for 2022:
- Single: $12,980
- Married filing jointly: $25,900
- Married filing separately: $12,950
- Head of household: $19,400
If you have a series of deductions that, in total, exceed the standard deduction then you will want to itemize them on a Schedule A. In other words, let’s say you’re a single filer, if you think you have more than $12,980 in total tax deductions, you will have to itemize them to get the full deduction. This also means you have to retain the paperwork and proof, just in case your tax return is audited. No proof required for a standard deduction.
You almost always want to use the method that gets you the highest tax refund (don’t claim the standard deduction because you think you’ll get audited, it’s extremely unlikely) but you can see now why a tax credit is so much better. 🙂
But when it comes down to the numbers – this is why a tax deduction is less attractive than tax credit – you need a sum total of deductions greater than the standard deduction. With a tax credit, you just get it if you qualify.
Some tax deductions are “above-the-line” deductions, which means you can claim them even if you don’t itemize your deductions. One common above the line deduction is if you’re a teacher and pay for some expenses out of pocket, known as “educator expenses.”
Now you know the difference between a tax credit and tax deduction!
Cindy says
You should check into the Child Tax Credit further, because if you do not owe any taxes, as in your tax liability is 0, then you can only get up to $1,400 of the $2,000 credit.
Yes, that’s true, it’s only a partially refundable tax credit.
Susan says
Thank you for clarifying this for us.
Bianca says
So if we’re claimed as dependents in 2019 but not in 2020 would we get $1200 added to next years tax refund when we file? These stimulus checks seem to leave out a lot college students that depend on themselves.
Yes, since it’s structured as an advance on a refundable tax credit for 2020, those college students could file their taxes next year (for the tax year 2020) and get their check then.
Bre says
I’m a single mother with two kids. I am trying to buy a house. For my payroll tax deductions – I put single with zero dependents for state and federal. I did this hopeful to get a bigger return 2020 to help with me with a down payment. Someone told me that I should be put more dependents. They sai the government could keep all the money instead of refund it. Because of the stimulus check
No, the stimulus check created a new tax credit so it won’t impact your refund.
You should put the correct number so your employer doesn’t withhold too much.
Ange says
They say you have to file taxes if you are on Social Security and you have dependents and you still get nothing back; is my friend doing it right and does she have to file a tax return it is just her and her 3 children?
Whether or not you have to file depends on your income so I can’t speak to your friend’s situation.
Mike says
I was looking for Clarification. If I’m owed $100 next year in Federal Taxes because I overpaid, would I still get the $100 refund or no because I was already given an advance on my taxes with the $1,200 Stimulus Check?
You would still get the $100 refund. The stimulus check created a separate credit so if you would’ve been owed just $100, you now would be owed $1300 but $1200 was already paid out.
Jenni L. says
So when we file our taxes next year, we will have to add the amount stimulus $ given on a particular line which will then zero out that portion of of refund. I’m guessing that’s how it will work?
I’d expect the IRS will add extra lines to cover that.
Brittany says
So basically, if my tax return comes up with a $2400 tax refund, I won’t get any tax refund back in 2020 because it’s been paid out already through the CARES act and if the newer CARES II act (proposed recently) passes? Thanks for the clarification… taxes are confusing!
Somewhere on Form 1040 it’ll take care of that (give you the credit and account for you receiving the check already) so after you calculate all the lines and get to the end, what you see is what you’ll get.
Dee says
I’m not sure if I understand your last reply. If on average I get back 1800. To 2000 in tax refund in a given year I wont get anything because yhey have given the stimulus of 2400?
The stimulus check won’t affect your refund, but other changes might.
Carol Sargeant says
I understand nothing about what I just read. I don’t make enough money to pay taxes. I am single, 78, with no dependents. Do I get a stimulus check?
You should and you have until October 15th to fill out this form – https://www.irs.gov/coronavirus/non-filers-enter-payment-info-here
Judy A Dust says
What about seniors that haven’t had to file any income taxes, will this have to be claimed as income so we have to file a return?
Nope, it’s a refundable tax credit and not considered income.
Katrisha says
Ok, just want to clarify. So if I normally receive a 5000.00 tax refund every year. This year received 2400.00 in Stimulus Advance checks. Does that advance mean that this year when I file my taxes, I’m only going to get a 2600.00 tax refund because they will deduct the 2400.00 they already gave me?
No, they created a $2,400 credit and just paid it out now rather than waiting until next year. You will get your normal refund as long as your tax situation did not change significantly.
Lisa says
single, no dependents. I usually get back 1100 in federal and pay state every year. Will I get a federal return because of the stimulus?
It depends on your income – if you earn (adjusted gross income) less than $99,000 then you’ll get a larger check.
Eric Baker says
Eric
So, my situation is not that unique I just want to know if I didn’t claim my son on 2019 taxes but will do so on 2020…how will that affect my taxes since I didn’t receive the extra dependent money on my stimulus check?
You will likely get it with your 2020 rebate.
Craig Whitman says
Hi,
My son filed his 2019 tax returns, but mistakenly had the wrong address (he’d just moved). He has not received his stimulus check (he qualifies) and can’t get the info from Get My Payment, probably due to the mix-up with his address. He has not been successful calling IRS. If he waits until he files his return for 2020, is there a way to get his check at that time, in addition to his tax refund for 2020? For example, will there be something on the return that alerts IRS that he didn’t get his check?
Thank you!
I believe that if he files next year, he should be able to get his rebate then.
Ana says
I claimed my daughter who is 17 as a dependent for 2019 Taxes. But was not qualified for the stimulus. If she files for 2019 & 2020 would she be qualified then and get a increase on her refund?
She would get it after she files her 2020 tax year (in April 2021) because the stimulus check was created for the 2020 tax year.
Maggie says
Ok so I actually understand taxes very well. But our government and the IRS tend to make things sound confusing, and then the media doesn’t always report the full details when big things like this happen.
I believe you might have answered this above but I just want to verify I understand correctly.
So they created a new credit for the stimulus checks, that we’re getting now instead of next year, correct? Which means if nothing else has changed that would affect me tax wise, then I’ll still get the same refund I’ve been getting, correct?
Exactly!
Matt says
Last year I got $3,200 back, but had $4,000 in child tax credits, for my two children. With next year, all else being equal, will I then owe $800, because the refundable child tax credit has essentially already been given to me?
The child tax credits you go were for last year, you’ll get them again this year depending on how much your income changes.
Donna says
So it was clarified that if we normally get a refund, we still will even if we got a stimulus check, (and please tell me if I got that wrong). My son who is 19 now will be 20 in 2021. He will have no income cause he doesn’t work yet due to special needs. My question is, can he file a tax return showing no income for 2020, and get a $1200 refund because of the tax credit from Cares Act?
As far as I understand it, yes. The tricky part will be – you will have to figure out whether you get more from claiming him as a dependent vs. him filing his own return.
Kel says
If our combined income could pass 150k for 2020 but was below in 2019 how can we calculate what is owed? Also, what if we claim 3 dependents in 2019 and 4 in 2020.
They will just use your 2019 information and send you a check based on that. If you are due more, they’ll make up for it when you file your taxes next year.
Kel says
Thank you. So, if we pass the $150k mark in 2020 will we have to pay a portion back if our 2019 income was below 150? How can we calculate what we would owe?
No, they’ve said that they won’t take back any overages.
Randi Moxley says
Ok, so I’m super duper confused… I’m a single Mom with 2 kids (16 and 6 y/o), and I work 2 jobs and my AGI is usually $29-30K. I usually get anywhere from $7,000-8,000 back on my tax refund check, because I file single or head of household.
My income isn’t going to change this year and might even be a few thousand less, or just about the same. So I got $2,200 from the 1st round of stimulus checks and if I get another $2,200 for the 2nd round of stimulus checks, am I still going to get my full refund check in February 2021?
I see you’re answering similar questions on here, but I’m not understanding your answers. You keep saying, no that we’ll still get our usual amount on our tax refunds, but how is that so? Will it still be the same for the 2022 tax refunds as well? I’m just not understanding how the stimulus is a “tax credit” and it won’t affect our tax refunds at all. Please explain in detail if you don’t mind, because I have coworkers also asking the same questions. Thanks so much! God Bless!
Hi Randi – Yes, your tax refund will not be affected by the check. The law that created the stimulus check also created a new one-time tax credit of $2,200 (in your case) for you. The law also made it so that they paid the credit out right now, rather than waiting until you file your tax return next April.
Chris says
A little outside the lines here, but still relevant. Why were adult dependants, not living with me, excluded from stimulus checks? After al,l I had to pay half their annual income to qualify as a dependant. Would that not show they need the stimulus as much as anyone else?
I don’t know the reasoning why they excluded dependents that were 17 or older – it doesn’t make sense to me since to qualify as a dependent, you’d have to have supported them at least 50%.