Tax credit
Also called refundable credit, nonrefundable credit
A dollar-for-dollar reduction of the tax owed, which makes it more valuable than a deduction of the same size.
What it means
A tax credit is subtracted directly from the tax bill rather than from income. Credits are often aimed at specific goals, such as supporting families with children, low- and moderate-income workers, education, retirement saving, or energy-efficient improvements.
Credits come in two main kinds. A nonrefundable credit can reduce tax to zero but no further. A refundable credit can exceed the tax owed, and the extra is paid to the taxpayer as a refund. Some credits are partly refundable, and many phase out as income rises.
Example
Suppose someone owes $3,000 in tax. A $1,000 nonrefundable credit cuts the bill to $2,000. If they owed only $500, a nonrefundable credit would cut it to zero, while a fully refundable $1,000 credit would also produce a $500 refund.
How it’s used
- Families with children or education costs
- Low- and moderate-income workers
- Home energy improvements
Good to know
- Many credits require specific forms or documentation, so it helps to check eligibility before filing rather than after.
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.