(NewsNation) — When handling your taxes, it can be tricky to decide whether to opt for a tax deduction, tax credit, or both if you’re eligible.

While both offer tax relief, they do so in different ways. Understanding the difference is essential since deductions and credits can be limited by your income.

Here’s what you should know:

What is a tax credit?

A tax credit reduces the amount of income tax you owe, on a dollar-for-dollar basis and can be nonrefundable or refundable.

A nonrefundable credit can reduce your tax liability to zero but not below that. Refundable credits can reduce your liability to zero, and if there’s any remaining credit, you’ll get the balance refunded.

Common tax credits include the Earned Income Tax Credit (EITC), which is refundable, and the Child Tax Credit.

You may also qualify for credits for buying an electric vehicle, making clean energy home investments, buying your first home, or buying health insurance through the marketplace.

What is a tax deduction?

A tax deduction reduces your taxable income for the year, potentially lowering the amount of taxes you owe. You can claim deductions in two ways: Standard deductions or itemized deductions.

Standard deductions are available to all taxpayers and can be claimed automatically. The amount depends on your filing status, with the largest deduction reserved for married couples filing jointly.

Itemized deductions require listing individual expenses you want to write off, such as business use of your home or car, alimony payments, student loan interest, and teaching expenses. Itemizing is typically more beneficial if your total deductible expenses exceed the standard deduction.

Tax credit vs tax deduction

Tax credits are often more valuable compared to deductions because they directly reduce your tax bill dollar-for-dollar.

For example, if you have a $1,000 tax credit and a $1,000 tax deduction, here’s how each would impact your tax liability:

• With a $1,000 tax credit, your $3,000 tax bill would be reduced to $2,000.
• With a $1,000 tax deduction, if you’re in the 12% tax bracket, it would only reduce your taxable income by $1,000, saving you $120 on your tax bill, not the full $1,000.

The best choice depends on your tax situation. If you’re eligible for both a credit and a deduction for the same expenses, doing the math can help you determine which option gives you the biggest break at tax time. Both tools can benefit your tax situation, but choosing the right one will depend on your situation.

If you’re unsure what deductions you might qualify for, consider working with a tax professional such as a financial advisor.

Steph Whiteside contributed to this report.