What is the difference between a tax deduction and a tax credit?

A tax deduction reduces your taxable income, which lowers your tax bill by your marginal tax rate times the deduction amount. If you are in the 22% bracket and claim a $1,000 deduction, you save $220. A tax credit directly reduces the taxes you owe dollar for dollar. A $1,000 tax credit saves you exactly $1,000 in taxes, regardless of your bracket. Credits are generally more valuable than deductions of the same dollar amount. Some credits are refundable (you can receive them as a refund even if your tax liability is zero); others are non-refundable (they can only reduce your liability to zero).