One of the most common misconceptions about filing an income tax return is the distinction between deductions and credits. Deductions lower a taxpayer’s taxable income before the tax is calculated. For instance, on an individual return, you can either claim the standard deduction or itemize deductions, depending on which option reduces your taxable income more. Credits, however, directly reduce the tax due, dollar-for-dollar, generally making them more valuable than deductions. Some credits, such as the Child Tax Credit, are partially or fully refundable, meaning that if the credit exceeds the tax owed the taxpayer may receive the difference as a refund.
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