Deductions vs. Credits: Understanding the Difference for Your 2025 Taxes

When planning for tax season, understanding the power of tax deductions and tax credits is essential—especially if you want to maximize your refund and keep more of your money working for you. At Fiscal Integrity Group (FIG), our mission is to provide clients with the knowledge and strategies that help reduce tax liabilities and support their financial well-being. Here's a complete guide to the differences between credits and deductions—and how to use both to your advantage.

What Is a Tax Deduction?

A tax deduction reduces the amount of your income that's subject to taxes. In other words, deductions lower your taxable income, which indirectly lowers how much you owe. The higher your tax bracket, the greater the savings from each tax deduction you claim. Deductions come in many forms:

• Standard deduction: The base deduction everyone can claim based on filing status
• Itemized deductions: Including mortgage interest, state and local taxes, gifts to charity, certain medical expenses, and more
• Above-the-line deductions: Student loan interest, IRA contributions, and health savings account contributions.

How do deductions work?
If you make $90,000 and claim $15,000 in deductions, you pay taxes on $75,000. In the 22% tax bracket, each $1,000 of deductions saves you $220—highlighting why knowing your bracket and available deductions is so important.

What Is a Tax Credit?

A tax credit directly reduces the amount of tax you owe. Every dollar of tax credit equals a dollar less in taxes—making credits more powerful than deductions of the same dollar amount. Tax credits come in two main types:

• Nonrefundable credits: Reduce your tax bill to zero but don't result in a refund if the credit is larger than your tax owed.
• Refundable credits: Can lead to a tax refund even if you owe no tax, like the Earned Income Tax Credit (EITC).

How do credits work?
With a $2,000 tax bill and a $500 tax credit, you pay $1,500—regardless of your income level. Popular credits include the Child Tax Credit, American Opportunity Tax Credit for education, and the EITC.

Deductions vs. Credits: What's the Real Difference?

• Deductions reduce taxable income, lowering your tax bill by a percentage based on your tax bracket.
• Credits reduce your tax due directly, dollar-for-dollar—often providing bigger savings than deductions.
• Deductions are more valuable to higher earners, while credits benefit everyone equally and sometimes go beyond zero to provide refunds.

Real-World Example

If you're in the 24% bracket:

• A $1,000 deduction saves you $240 in taxes.
• A $1,000 tax credit saves you $1,000.

No matter your bracket, a credit always provides a bigger benefit than a deduction of the same amount.

Can You Use Both Deductions and Credits?

Absolutely! The best tax strategies combine as many deductions and credits as you're eligible for to maximize your tax reduction. For instance, you might deduct IRA contributions and mortgage interest while also claiming a child or education credit.

Common Tax Mistakes to Avoid

• Assuming deductions and credits are the same—they're not!
• Overlooking refundable credits, which could get you a tax refund even with zero tax owed.
• Not itemizing deductions when they could save more than the standard deduction.
• Forgetting that above-the-line deductions can be claimed even when you take the standard deduction.

The FIG Approach: Make Every Dollar Count

At Fiscal Integrity Group, we help our clients leverage every available tax deduction and credit to keep more of their hard-earned money. By understanding the unique tax situation of every family, business, and individual, we design strategies to maximize refunds, minimize tax liabilities, and support your long-term financial goals.

In Summary: Tax Credits vs. Tax Deductions

• Deductions lower your taxable income; credits reduce your actual tax bill.
• Credits are more valuable dollar-for-dollar.
• You can—and should—use both if eligible.
• FIG can help you create a personalized tax strategy for 2025 that includes the best mix of deductions and credits for your situation.

Ready to make the most of your tax return? Contact Fiscal Integrity Group today for expert advice on tax credits, tax deductions, and the smartest ways to lower your tax bill in 2025.