Video: Tax Credits vs. Deductions

In this lesson, Nick Palazzolo, CPA, unravels the nuances between tax credits and deductions—two mechanisms that can lower tax liability, but operate in distinct ways. With a practical approach, he illustrates how deductions work to decrease the initial income subject to tax, whereas credits offer a more potent, dollar-for-dollar reduction in tax owed, potentially even leading to a refund. Using understandable examples, he demonstrates the financial impact of a $10,000 deduction versus a $10,000 credit on a hypothetical taxable income, clearly showing why credits usually offer greater savings. Furthermore, Nick expands on the concept of refundable tax credits, a key area where credits can trump deductions by not only reducing what is owed to zero but also allowing the opportunity to receive a refund.