A tax credit reduces the amount a taxpayer owes as opposed to a tax deduction, which only lowers taxable income. Typically, a tax credit is better than a tax deduction in lowering the overall amount paid in taxes.
Some tax credits are refundable, meaning that even if the credit exceeds the income tax owed, you can still claim the full credit, leaving a negative balance. The government will send you a check for the remaining balance. Refundable credits include the earned income credit, the excess Social Security credit, the additional child tax credit and the health coverage tax credit.
Most tax credits are nonrefundable, meaning that the credit can reduce your taxes to no lower than zero. If the credit exceeds your tax obligation, you forfeit that amount.
Common Tax Credits
The child tax credit is a common credit for parents with children under the age of 18. The adoption credit and education credit are some other common tax credits.
New Tax Credits
In response to the troubled economy, the Internal Revenue Service (IRS) created the Making Work Pay tax credit. For 2009 and 2010, the Making Work Pay tax credit was available for singles making less than $75,000. For married couples filing jointly, the salary was $150,000.
Always be aware of any new tax credits for which you may qualify. Visit the IRS website or an accountant for more details.
Shanika Chapman has been writing business-related articles since 2009. She holds a Bachelor of Science in social science from the University of Maryland University College. Chapman also served for four years in the Air Force and has run a successful business since 2008.