Here are the basics on deductions and credits. This is not a list of types, but an explanation of the impact credits and deductions have on your taxes.
The base line on your taxes is your income. That is why taxes are often called “income taxes”. For simplicity (this is by no means accurate for tax brackets) lets say I made $40,000 in 2008 and pay 25% in taxes. I would have a $10,000 tax bill for 2008. (Those are not my income or tax numbers, this is just an example).
It is not that simple if you are a student or support a student (credit) or make donations to a qualified non-profit (deduction). Student loan interest (deduction), kids (credit), mortgage loans (deduction) and many more normal activities can lower your $10,000 tax bill.
In 2008 I had a tuition bill of $24,000. Tuition and related expenses (not room and board) can qualify for the “Hope Credit” or “Lifetime Learning Credit” depending on the situation. I qualify for the lifetime learning credit, which is a 20% tax credit up to $2,000. 20% of my tuition is $4,800, so I qualify for the maximum credit of $2,000. Because it is a credit, I can take that $2,000 off my tax bill and would owe $8,000 for 2008 in the example above. A credit subtracts from the total tax bill and has a bigger impact than a deduction.
Lets say I donate $2,000 to my synagogue in 2008. (I did not donate that much, but did donate something). Because a non-profit donation is a deduction, I would subtract $2,000 from my income of $40,000, leaving me with a taxable income, also called an adjusted gross income, of $38,000. At 25%, my taxes would be $9,500.
So a $2,000 impact to my taxes could have an adjusted impact of only $500. That is $1,500 less than a credit. That does not mean you should not donate to your favorite 501(c)3, but you should be aware of the difference between a deduction and a credit.
I hope that explains the difference. Feel free to list anything I left out in the comments.