How deductions are used?

Answer 1

Deductions reduce the amount of your income that is taxed. This means that your taxes are reduced by a percentage of the deduction.

Example:
10% tax rate on $10,000 of taxable income is $1,000. You are eligible for a deduction of $2,000, so your taxable income is reduced to $8,000. 10% tax rate on $8,000 of taxable income is $800. At 10% tax rate you saved $200 (deduction x tax rate percentage).

Once the tax is calculated, your tax can be reduced by tax credits. Tax credits reduce your tax dollar for dollar which means a $100 tax credit reduces your tax by $100.