Final answer:
When making tax decisions, a tax credit directly reduces your tax owed, while a deduction reduces your taxable income. The better option depends on which saves you more money, often influenced by your income and expenses.
Step-by-step explanation:
When deciding whether to claim a tax credit or a deduction on your taxes, it's important to understand the differences between the two. A tax credit directly reduces the amount of tax you owe, dollar for dollar. On the other hand, a deduction lowers your taxable income, which indirectly reduces the amount of tax you owe by reducing the income that gets taxed at your marginal tax rate.
For example, if you are in a 22% tax bracket, a $1,000 deduction reduces your taxes by $220 (22% of $1,000), but a $1,000 credit reduces your taxes by the full $1,000.
To decide which is better for your situation, you would typically choose the option that saves you the most money. In some cases, a credit might be more valuable because it reduces your tax liability directly. However, in other cases, especially if you have a high income or lots of expenses, a deduction could save you more because it reduces the amount of your income subject to tax.