Tax Credit

A tax credit directly reduces the amount of tax you owe. Unlike a deduction—which only lowers your taxable income—a tax credit lowers your tax bill dollar-for-dollar, making it one of the most powerful tax benefits available.

💡Simple definition

A tax credit subtracts directly from your tax bill. If you owe $2,000 in taxes and you have a $1,000 tax credit, your tax bill becomes:

→ $2,000 − $1,000 = $1,000

⚖️Tax credit vs deduction

Credits and deductions are not the same. A simple way to compare:

💳Deduction

Lowers your taxable income (indirect savings).

✨Credit

Lowers your actual tax bill (direct savings).

A $1,000 credit saves you $1,000.

A $1,000 deduction saves you only a portion of that.

📋Types of tax credits

1️⃣Nonrefundable credits

These can reduce your tax bill to $0, but they cannot create a refund by themselves. Examples:

•Child and Dependent Care Credit
•Lifetime Learning Credit
•Saver's Credit

2️⃣Refundable credits

These can reduce your tax below $0, meaning you can get a refund even if you paid no tax. Examples:

•Earned Income Tax Credit (EITC)
•Portions of the Child Tax Credit
•American Opportunity Credit (partially refundable)

3️⃣Partially refundable credits

Some credits have both refundable and nonrefundable portions, depending on your income and filing status.

⭐Why tax credits matter

Credits are one of the strongest tools for lowering your tax liability. They can:

✓Directly reduce your tax bill
✓Qualify you for refunds even with low income
✓Help families with children, students, and workers with lower or moderate income
✓Offset education expenses or retirement savings