Tax Credit
A dollar-for-dollar reduction in the amount of tax owed, more valuable than a deduction of the same amount.
What is Tax Credit?
A tax credit directly reduces the amount of tax owed, dollar-for-dollar — making it more valuable than a tax deduction of the same amount. A $1,000 credit reduces your tax bill by $1,000 regardless of your tax bracket; a $1,000 deduction only saves tax equal to $1,000 times your marginal rate (e.g., $220 in the 22% bracket). Credits are either refundable (the government pays any excess beyond the tax owed), non-refundable (the credit reduces taxes to zero but cannot generate a refund), or partially refundable. Common credits include the Child Tax Credit, Earned Income Tax Credit (EITC), Child and Dependent Care Credit, American Opportunity Tax Credit (education), and the Saver's Credit for retirement contributions.
Example
A taxpayer owes $3,500 in federal income tax before credits. They qualify for a $2,000 Child Tax Credit (partially refundable) and a $1,000 Saver's Credit (non-refundable). The Child Tax Credit reduces their liability to $1,500, and the Saver's Credit reduces it further to $500. If the Child Tax Credit were fully refundable and they had only $400 in tax, they would receive the $1,600 balance as a refund.