Saving money by shrinking your tax bill feels great, and it all starts with knowing how to use tax deductions and tax credits to your advantage. Before you file your return, make sure you understand how each one works and why they both reduce your tax burden — just in different ways. What is a tax credit? A tax credit directly reduces the taxes you owe the Internal Revenue Service (IRS) by providing a dollar-for-dollar reduction of your actual tax bill. For example, if you owed $2,500 on your tax return ...