Tax Credit
A tax Credit is an amount of Money that taxpayers can subtract directly from the taxes they owe to the government. Unlike Tax Deductions, which reduce the amount of Taxable Income, tax Credits provide a dollar-for-dollar reduction of tax Liability.
Types of Tax Credits:
- Nonrefundable Tax Credits: These can reduce your tax Liability to zero, but not beyond that. For example, if you owe $500 in taxes and have a nonrefundable Credit of $600, your tax bill will be reduced to $0.
- Refundable Tax Credits: These allow you to receive a refund if the Credit exceeds your tax Liability. For instance, if you owe $300 in taxes and have a refundable Credit of $500, you can receive a $200 refund.
- Partially Refundable Tax Credits: These Credits can be refunded up to a certain limit. For example, if you owe $400 and have a partially refundable Credit of $600, you may get a refund of $200, depending on the Credit’s specific rules.
Examples:
- Earned Income Tax Credit (EITC): A refundable Credit for low-to-moderate-income working individuals and families, which can significantly reduce their tax burden.
- Child Tax Credit: A partially refundable Credit available for each qualifying child under the age of 17, which can provide a substantial reduction in taxes owed.
- American Opportunity Tax Credit: A partially refundable Credit for qualified education expenses for the first four years of higher education.