Tax credits and deductions are similar but different methods of reducing one’s income tax liability. Tax deductions are subtracted from a taxpayer’s adjusted gross income (AGI), which reduces taxable income. Tax credits are subtracted directly from the total amount of taxes someone owes.

Tax credits are generally granted for specific situations and are for a specified amount. For example, the Child Tax Credit allows eligible taxpayers to claim up to $2,000 per qualifying child under age 17, directly reducing the amount of federal income tax they owe.

Determining whether a tax credit or tax deduction is better for a federal income tax return depends on the situation. Not everyone may qualify for a tax credit. Remember, they are only granted in certain situations for specific amounts.

As shown above, generally, a tax credit of the same amount is considered “more valuable” than a tax deduction, because a tax deduction only lowers the amount of income someone is liable to pay taxes on. A tax credit reduces the total tax owed.