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Frequently Asked Questions
Refundable credits can result in a refund even if they exceed your tax liability—the government pays you the excess. Nonrefundable credits only reduce tax to zero; any excess is lost (unless carryforward rules apply). The Earned Income Credit is refundable; the Lifetime Learning Credit is nonrefundable.
Above-the-line deductions (deductions for AGI) reduce AGI, which affects eligibility for many tax benefits that phase out at higher income levels. They're valuable even if you take the standard deduction. Examples: student loan interest, IRA contributions, self-employment tax deduction.
Itemize when total itemized deductions exceed the standard deduction. Common itemized deductions include state/local taxes (capped at $10,000), mortgage interest, charitable contributions, and medical expenses exceeding 7.5% of AGI. Most taxpayers take the standard deduction since the 2017 increase.
Credits reduce tax dollar-for-dollar, while deductions only reduce taxable income. A $1,000 credit saves $1,000 in tax. A $1,000 deduction saves $1,000 times your marginal tax rate (e.g., $220 if you're in the 22% bracket). Credits are especially valuable for lower-income taxpayers.