Tax Write-Off vs. Tax Deduction vs. Tax Credit: What’s the Difference?

Among tax write-offs, deductions, and credits, you have a few different ways to ease the financial burden of paying your taxes. With these tax advantages, you can lower your taxable income, reduce what you owe, and possibly increase your refund.

Depending on your situation, what you qualify for can change from year to year, and by familiarizing yourself with what each option offers and how it works, you can be strategic about keeping money in your pocket every tax season.

Tax Write-Offs and Tax Deductions

Tax write-offs and tax deductions are often used interchangeably because they both refer to expenses that reduce your taxable income, ultimately lowering the amount of taxes you owe.

Taxpayers must choose between standard and itemized deductions:

• Standard deduction: Reduces taxable income by a certain amount
• Itemized deductions: Reduces taxable income based on a list of provided expenses. This option is ideal when expenses exceed the standard deduction amount.

Tax Credits

Tax credits reduce the amount of taxes you owe. Options include nonrefundable tax credits and refundable tax credits. Nonrefundable tax credits reduce your tax liability, but any amount that exceeds what you owe is not refunded to you. With refundable tax credits, however, the excess amount is refunded.

For example, if you owe $1,500 in taxes and qualify for a $2,000 nonrefundable tax credit, your tax liability will be reduced to zero, but the remaining $500 is lost. If the $2,000 credit is refundable, you’ll receive the remaining $500.

Qualifying for Write-Offs, Deductions, and Credits

To qualify for tax write-offs, deductions, and credits, you must meet specific criteria, such as income limits, filing status, or dependent status.

When it comes to reducing your taxable income, write-offs and deductions play a key role. With the standard deduction, you’ll opt to have your income reduced by a set amount of $15,000 for single filers and married couples filing separately, $22,500 for heads of household, or $30,000 for married couples filing jointly. This option makes sense if you don’t have anything you want to write off or if your expenses don’t exceed the standard deduction amount. However, with itemized deductions, if your expenses exceed the standard deduction, you’ll see more of a reduction in taxable income.

Common tax write-offs/deductions include:

• Charitable Donations: Cash and non-cash donations made to qualifying organizations
• Student Loan Interest: Up to $2,500 of interest paid on a qualified student loan
• Medical Expenses: Medical and dental expenses for yourself, your spouse, or your dependents if they exceed 7.5% of your adjusted gross income (AGI)

Business owners are also able to take advantage of write-offs during tax season.

“For businesses, write-offs play an important part in reducing their taxable profit. Common expenses like office supplies, office rent, and employee salaries can be deducted, lowering the business’s taxable income and ultimately reducing its tax liability,” said Guelita Pericles, accountant and owner of The Financial Quench.

Tax credits are where you can lower your tax bill and potentially get a refund. Common tax credits include:

• Child Tax Credit (CTC)/Additional Child Tax Credit (ACTC): Offers a nonrefundable credit of up to $2,000 per qualifying child to taxpayers with children age 17 or younger at the end of the year. The refundable portion, the ACTC, offers a credit of up to $1,700.
• Earned Income Tax Credit (EITC): Refundable and available to taxpayers with less than $11,600 in investment income and income between $18,591 (single, no children) and $66,819 (married, three or more children).
• American Opportunity Tax Credit (AOTC): Offers up to $2,500 per eligible student for education expenses during the first four years of higher education, with up to $1,000 refundable if the credit brings the amount of tax owed to $0.
• Other Dependents Credit (ODC): A credit of up to $500 can be claimed for a dependent who doesn’t qualify for the CTC.

Note that some credits, like the CTC/ACTC or EITC, are tied to specific years and can’t be carried over, while others, like the AOTC, do not have to be claimed in that particular year.

Which Is Better?

While deductions and credits can both positively impact your tax bill, credits can have the most influence. With a deduction, you are only reducing the amount of income subject to tax, but a credit directly applies to the amount due, lowering your tax liability.

Is It Worth It to Claim Both Tax Deductions and Tax Credits?

Yes, it is worth it to claim both tax deductions and credits. In fact, using them together is a great way to lower your tax liability and potentially earn a refund. The Internal Revenue Service (IRS) provides weekly cumulative filing season statistics that include the average tax refund as of the most recent Friday compared with the corresponding year-ago Friday; looking up that average highlights how taking advantage of this strategy could put money in your pocket.

Even when eligible to claim both, taxpayers want to be mindful of any rules that could impact if their claims for deductions or credits are accepted.

“There are several important rules and limitations that taxpayers should keep in mind when claiming deductions, credits, or write-offs. Some deductions, like mortgage interest or medical expenses, require taxpayers to itemize rather than take the standard deduction,” said Pericles.

And if you’re a business owner, you also want to be careful when claiming expenses so you don’t get things mixed up.

“The IRS doesn’t like commingling expenses and income. Taxpayers should separate business and personal expenses,” Pericles recommended.

She also recommended taxpayers hold on to things like receipts and invoices, as the IRS requires documentation when certain credits are claimed.

The Bottom Line

Owing taxes can be a significant financial burden. Thankfully, there are ways to ease the impact. If you know how to leverage your options, including using tax write-offs and deductions to lower your taxable income and tax credits to reduce your tax bill, you can minimize your tax bill and maximize your savings.