Every new deduction on this site shares one misunderstanding: people hear a deduction figure and read it as money off their tax bill. It is not, and the difference decides what these deductions are really worth to you.
A deduction cuts income. A credit cuts tax.
A deduction reduces the amount of income that gets taxed. A credit reduces the tax itself, dollar for dollar. A $3,000 credit takes $3,000 off the tax you owe. A $3,000 deduction takes $3,000 off your taxable income, and the tax saving is that amount multiplied by the rate at which your top dollars are taxed, your marginal rate.
The same deduction, three different values
Take the $3,000 overtime premium from our canary example, $30 an hour and 200 overtime hours. At a 12 percent marginal rate it saves about $360 of tax. At 22 percent, about $660. At 32 percent, about $960. Nothing about the worker’s overtime changed; only their income bracket did. This is also why the deductions phase out at higher incomes in the law itself.
Why our calculators do not show a saving
Most calculator sites pick a rate for you, often 22 percent, and print a saving that may have nothing to do with your return. We will not guess. The calculators show your deduction, the figure the law defines, and if you want the saving, multiply it by your own marginal rate from your last return or your expected bracket. Honest arithmetic beats a confident guess.