Both tax credit and tax deductions reduce the amount of money you will end up paying in taxes but they do so in different ways and it is important to understand how each works. In short, a tax deduction is an expense that you can deduct from your taxable income, reducing the amount you owe. A tax credit, on the other hand, offers a reduction of your tax bill. A tax credit is generally considered better than a tax deduction. For example, a $10,000 tax credit will save you more money than a $10,000 tax deduction. This is because the tax deduction is taken out of your taxable income before your tax bracket's rate is applied to calculate your bill. This has a lesser effect in lowering your tax bill than a tax credit which is taken out of your taxes after the bill has already been calculated with your current tax bracket's rate.