Tax credits

Definition

Tax credits are amounts subtracted directly from the tax owed, reducing the overall tax liability. They can be either refundable or non-refundable.

5 Must Know Facts For Your Next Test

1. Tax credits directly reduce the amount of tax you owe, unlike deductions which reduce your taxable income.
2. Refundable tax credits can result in a refund if they exceed your tax liability.
3. Non-refundable tax credits can only reduce your tax liability to zero and cannot result in a refund.
4. Common examples of tax credits include the Earned Income Tax Credit (EITC) and Child Tax Credit.
5. Claiming multiple tax credits may require filing additional forms or schedules with your tax return.

Review Questions

• What is the difference between a refundable and non-refundable tax credit?
• How does a tax credit differ from a tax deduction?
• Name two common types of tax credits that individuals might claim.

Related terms

taxDeduction: A reduction in taxable income, which lowers the amount of income subject to taxation.

earnedIncomeTaxCreditEITC: A refundable credit for low- to moderate-income working individuals and couples, particularly those with children.

childTaxCredit: A partially refundable credit given to taxpayers for each qualifying dependent child under age 17 at the end of the calendar year.