This Tax Confusion Could Be Costing You Money — a CFP Explains How To Fix It
Written by
Laura Bogart
Edited by
Kristen Mae
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When it comes to tax planning, the jargon alone is enough to trip you up. Tax deduction. Tax credit. Potato. Poh-ta-toe. Right? Not so fast. They sound similar, but the difference between them is anything but small. While it’s easy to mix the two up, understanding how they work now — before tax season begins — could save you from leaving money on the table.
As a principal at CAPTRUST and a seasoned financial planner, Veronica Karas, CFP, is adept at helping people navigate complex tax concepts. Fortunately, clarifying the differences between a tax credit and a tax deduction isn’t the hardest tax-related task out there, but it can be a meaningful one. GOBankingRates caught up with Karas to learn how to fix this common and costly tax-related confusion.
Clarifying the Confusion — and Why It Matters
According to Karas, the simplest way of explaining the difference is this: a tax deduction reduces your taxable income, while a tax credit reduces your tax liability dollar for dollar. She says that this difference is critical. To help you visualize the significance, she offers a hypothetical example: “If you’re in a high marginal tax bracket, a deduction saves you a percentage of its amount. For example, a $10,000 deduction in a 37% bracket might save you $3,700,” she said. “But a $10,000 tax credit knocks $10,000 right off what you owe the IRS. So credits are generally more powerful.”
Looking at those numbers, it’s clear why Karas tells her clients that understanding this difference is a major step in planning intentionally — not just reacting at tax time.
Knowledge Equals Empowered Planning
When you don’t understand certain tax terms, you’re less able to use them to your benefit when planning your finances and tax prep. Karas grounds this knowledge in practical, everyday applications for her clients.
As they consider common deductions, she suggests reviewing mortgage interest, charitable contributions, and state and local taxes within their limits under current law. If a client owns a business, they may be able to deduct ordinary and necessary expenses related to running that business. All of these deductions lower the income subject to tax. However, don’t stop there. Now that you’re savvy about tax credits, it’s worth identifying the ones that fit your situation. You can even find valuable credits in surprising places, like boosting your home’s energy efficiency.
“Credits are more varied but often more impactful. There are credits for child and dependent care expenses, education credits like the American Opportunity Credit (AOTC), and energy-efficient home improvements,” Karas said. “For high-net-worth families, things like the foreign tax credit can be important, especially if they invest globally.”
With proper insight and planning, you can turn deductions and tax credits into a one-two punch of savings. Working with a qualified tax advisor, you can develop a strategy that maximizes both.
“The bottom line is that deductions soften the blow, while credits can eliminate tax owed outright — so planning for both is key,” Karas said.
Knowledge Also Keeps You From Making Mistakes
Now that you grasp the core differences between a tax deduction and a tax credit — and, crucially, how to use both — Karas urges taxpayers to dig into the rules to avoid common, costly mistakes.
One of the biggest misconceptions around deductions is assuming they’re all created equal — or that you can write off that steakhouse lunch or elite pen set simply because they were related to work. Karas reminds you that the IRS is very strict about what qualifies — and it’s better to hear it from her than the IRS.
She also sees people forget about carryforwards — unused losses or credits from one tax year that can carry forward to offset income or liabilities in subsequent years. Karas cites charitable deductions that exceed annual limits as prime candidates to carry forward into future years. So, keep track of them.
Karas also cautions against ignoring phaseouts and income limits for certain tax credits. While a particular credit might look attractive, your income could be too high to qualify — or you may receive only a reduced benefit. Conversely, overlooking credits you do qualify for can cost you at tax time. “I always stress that tax planning is proactive,” Karas said. “It’s about knowing the rules ahead of time so you don’t just find out you missed an opportunity when it’s too late to fix it.”
Bottom Line
It’s easy to confuse a tax credit with a tax deduction — but understanding the difference can translate into real savings. Being in the dark about it could cost you every year — and, according to Veronica Karas, the best way to take that money is to learn the rules and plan ahead with your advisor.
This article is part of GOBankingRates’ Top 100 Money Experts series, where we spotlight expert answers to the biggest financial questions Americans are asking. Have a question of your own? Share it on our hub — and you’ll be entered for a chance to win $500.
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