Tax Credit vs. Tax Deduction: What's the Difference? Both tax credits and deductions can reduce how much you owe on your taxes, but they work in different ways. Here’s a breakdown that’s easy to understand: **Tax Credit** Directly reduces the amount of tax you owe -Example: If you owe $2,000 in taxes and claim a $500 tax credit, your bill drops to $1,500. **Refundable vs. Non-refundable** - Refundable credits (like the Earned Income Tax Credit) mean you can get money back, even if you owe nothin