Which educational credit to take?

[greencode96]

Not sure if this is the right area, but I have a question about which educational credit to take. Turbo recommends American Opportunity Credit but as you can see the amount for tuition deduction looks like more (and is up to 4000). Is this not a deduction? I am confused.

[DawnC · Accepted solution]

Credits are more valuable than deductions.  See this article for a more detailed explanation.  

The deduction amount is subtracted from your taxable income and then your tax rate is applied, so you only see a portion of the deduction in your final tax bill.   The credit directly reduces your tax bill.  

Anytime you want to look at that screen again or change your option to compare, type letme (no space) in the search bar and use the Jump to link to get back there.  You can look at your 1040 to see the effects of each option.  

[Carl]

A credit is better and worth more dollar-wise than a deduction.

- Tax Credit:  Reduces your tax liability dollar for dollar. So if you have a tax liability of $5000, a $2000 credit reduces your tax liablity to $3000.

 - Deduction: Reduces the amount of income you are taxed on. So if you have $50,000 of taxable income taxed at 10%, that gives you a $5000 tax liability. A "deduction" of $4000 reduces your taxable income to $46,000. At 10% your tax liability would be $4,600. Thats $1,600 more you would pay in taxes, than a $2000 tax credit gets you.