If you’re self-employed or working in the creative industry like a DJ, content creator, or freelance designer, understanding the difference between tax credits and tax deductions is essential to keeping more of your income.
Both can lower your tax bill, but they do it in very different ways. Let’s break it down.
What Is a Tax Deduction?
A tax deduction reduces your taxable income, which is the amount the IRS uses to calculate your taxes owed. The lower your taxable income, the less you’ll owe in taxes.
Example: Let’s say you made $80,000 last year. If you claim $5,000 in tax deductions, your taxable income drops to $75,000. Assuming the deduction falls within the 22% tax bracket, that saves you around $1,100 in taxes.
Common Tax Deductions for Freelancers and Creators:
- Business-related travel and lodging
- Equipment and software
- Home office expenses
- Retirement plan contributions (e.g., SEP IRA)
- Health insurance premiums
- Student loan interest (up to $2,500, income limits apply)
Including these deductions in your return is a smart way to unlock tax savings for self-employed professionals.
What Is a Tax Credit?
A tax credit directly reduces your tax liability—the amount you owe to the IRS—dollar for dollar.
Example: If your tax bill is $4,000 and you qualify for a $1,500 tax credit, you only owe $2,500.
There are two types of tax credits:
- Refundable tax credits: You get money back even if your tax bill is $0 (e.g., Earned Income Tax Credit).
- Nonrefundable tax credits: These reduce your bill to zero but don’t trigger a refund beyond that (e.g., Saver’s Credit).
Common Tax Credits for Self-Employed Filers:
- Child Tax Credit
- American Opportunity Tax Credit (for education)
- Energy-efficient home improvement credits
These credits can be especially valuable if you’re looking to lower your year-end tax bill.
Which One Saves You More?
If you’re wondering which is better between a tax credit vs tax deduction, the short answer is: tax credits are generally more powerful.
While deductions lower how much of your income gets taxed, credits lower your final tax bill directly. But the good news is, you don’t have to choose. You can (and should) take advantage of both if they apply to you.
Next Steps: Stay Ahead of Tax Season
Tax season doesn’t have to feel like a guessing game. Whether you’re claiming a credit or maximizing deductions, understanding how both tools work can help you take control of your finances and your future. For freelancers and creatives, that means more money to reinvest in your craft, your business, or simply your peace of mind.
Not sure where to start with deductions or credits? Let us handle your taxes so you can stay focused on what you do best—creating. We’re here to help you make tax time a little less stressful and a lot more rewarding.
