Tax Credits vs Deductions

bennett zamani Updated on Dec 5, 2025

Tax Credits vs Deductions

Now is a good time to discuss a common point of confusion with regard to tax credits vs. tax deductions. This is important because credits and deductions differ in how they impact an individual’s tax obligations. The tax credit is what is used to reduce the taxpayer’s tax liability (the total tax debt owed) on a dollar-for-dollar basis. Thus, every dollar the person claims as a credit reduces their tax obligation by a dollar.

Remember when you hear tax credit, the amount you donate will reduce what you owe. For example if you owned $500 in taxes at the end of the year and made a donation of $500 and received a tax credit for that donation, your taxes owed would drop to $0.

Alternatively, a tax deduction reduces the taxpayer’s taxable income. So every dollar the person claims as a tax deduction reduces their taxable income by a dollar. This means that, based on the calculation from the individual’s income bracket, the person pays a tax on the amount left over after deductions are taken away. For example if you owned $500 in taxes at the end of the year and made a donation of $500 and received a tax deduction for that donation, your taxes owed would drop based on the tax bracket you were in. If you were in the 25% tax bracket, it would drop the taxes by around $125 where you would still owe $375. You might be understanding why a tax credit is far more helpful in lowering your tax bill then a tax deduction.

Now when making charitable donations, donating to a friend's GoFundMe might seem helpful and it can be, however it is neither tax credit nor a tax deduction. Same goes for political donations or foreign organizations that do not qualify for deductions.

For it to be eligible for tax deductions, the charitable organization must be registered as tax exempt under section 501(c)(3) of the Internal Revenue code. Oftentimes religious, educational or scientific organizations will fall under a qualification organization.

To claim a tax deduction for your charitable donations, you'll need to itemize your deductions on your tax return using Schedule A. This means you'll have to have enough deductible expenses to exceed the standard deduction amount. As of 2023, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly. If itemizing your deductions is making your eyes glaze over, just remember Tax Experts can do that for you in a snap.

The maximum amount you can deduct from your taxable income for charitable donations depends on the type of organization you donate to. You can generally deduct up to 60% of your adjusted gross income (AGI) for donations made to public charities and private foundations.

For donations made to donor-advised funds, the limit is 30% of AGI. If you donate more than the limits, you can carry over the excess to future tax years.

What we do for our tax clients and recommend is when making a donation that you may do throughout the year. When you make the donation, save a record of it in a place where you save your tax records. So at the end of the year it's easy to go back and see the donations you made instead of trying to remember when and where you donated. We have a designated folder for each client on our online portal where they can quickly and easily upload screenshots of the donations for easy record keeping.