Tax Credit
Definition
A dollar-for-dollar reduction in the amount of tax you owe, more valuable than a deduction. Tax credits can be nonrefundable (reducing your tax to zero but no further) or refundable (you receive the excess as a refund). Common credits include the Child Tax Credit, Earned Income Credit, American Opportunity Credit, and Lifetime Learning Credit.
Example
A $2,000 tax credit directly reduces your tax bill by $2,000. If you owe $5,000 in taxes, a $2,000 credit drops it to $3,000. Compare this to a $2,000 deduction, which might only save $440 if you're in the 22% bracket.
Related Terms
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