Your taxable income is divided into chunks, and each chunk is taxed at a different tax rate. It's important to recognize that every taxpayer's taxable income is divided into the chunks and taxed at the corresponding rate. Even a billionaire pays a 15 percent rate on some of his taxable income. When someone says he is in the 36 percent tax rate bracket, for example, this means he pays a 36 percent tax rate on additional taxable income, not that he pays 36 percent on all his taxable income. Deductions are expenditures used to reduce taxable income.
Taxpayers can use either the standard deduction or itemized deductions.
If the sum of the taxpayer's itemized deductions exceeds the standard deduction, then the taxpayer uses itemized deductions. A professional tax preparer often finds more eligible itemized deductions. Tax credits are more valuable than tax deductions because credits directly reduce the taxes you owe, whereas deductions reduce your taxable income. The earned income tax credit is for low-income working taxpayers. If you have children, there's a tax credit for each child.