{"id":353979,"date":"2022-08-19T07:44:43","date_gmt":"2022-08-19T12:44:43","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/tax\/federal-taxes\/what-is-a-tax-credit.html"},"modified":"2023-08-25T14:19:05","modified_gmt":"2023-08-25T19:19:05","slug":"what-is-a-tax-credit","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/tax\/federal-taxes\/what-is-a-tax-credit.html","title":{"rendered":"What Is a Tax Credit?"},"content":{"rendered":"\n
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What Is a Tax Credit?<\/h1>\n
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\n By J.P. Finet, J.D.<\/a> | Legally reviewed by J.P. Finet, J.D.<\/a>\n | Last updated\n
\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
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This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n

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Key Takeaways<\/h2>\n

A tax credit reduces the amount of income tax you owe the government by a specific amount. Unlike a tax deduction, which lowers the taxable portion of your income, a tax credit decreases your final tax bill. Some tax credits can even boost your tax refund beyond the amounts you\u2019ve had withheld or overpaid.<\/p>\n\n <\/div>\n <\/div>\n<\/div>\n

How Do Tax Credits Work?
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Tax credits are a dollar-for-dollar reduction of your liability for the tax year. For example, suppose you had $60,000 in adjusted gross income in 2022 and were eligible to claim a $500 tax credit. If you are married filing jointly, the federal income tax due on $60,000 in gross income would be $3,681. The $500 tax credit would then reduce the tax liability reported on your tax return to $3,181.<\/p>\r\n

Tax deductions decrease a taxpayer’s adjusted gross income<\/a>, which is the amount subject to the federal income tax. People are usually more familiar with tax deductions because they are generally claimed more often than tax credits. Common tax deductions include the standard deduction<\/a>, the deduction for donations to nonprofits, and the student loan deduction. The self-employed<\/a> can often take advantage of additional deductions.<\/p>\r\n

The difference between a tax credit and a tax deduction may seem like a minor distinction, but it can have a significant impact on your federal tax return. To illustrate how a deduction differs from a credit, let’s use the facts of the example above and give you a $500 tax deduction instead of a credit. The tax deduction will reduce your 2022 adjusted gross income from $60,000 to $59,500 and result in a $3,621 tax bill, a reduction of $60. Thus, with the same $60,000 in income, a $500 tax credit gives you $500 in tax savings, while a $500 tax deduction gives you $60 in tax savings.<\/p>\r\n

One advantage a tax deduction has over a tax credit is that by reducing your taxable income, the deduction may move you into a lower tax bracket. That generally means you will pay a lower tax rate.<\/p>\r\n

Refundable and Nonrefundable Tax Credits<\/h2>\r\n

There are two types of federal tax credits: refundable and nonrefundable. A refundable tax credit is one where the government will pay the taxpayer the total tax credit amount, even if it exceeds the amount of taxes owed. In other words, if a taxpayer can claim a tax credit of $750 but only owes $500 in taxes, the taxpayer can expect a tax refund of $250 since that is the amount of the credit that exceeds the taxpayer’s tax liability.<\/p>\r\n

As the name suggests, nonrefundable tax credits can eliminate a taxpayer’s liability but not exceed your tax liability. Therefore, you will not receive a tax refund from the government if the credit exceeds the total tax amount owed.<\/p>\r\n

Refundable credits are often used by the federal government to give additional money to certain types of individual tax filers and businesses. For example, the child tax credit<\/a> (CTC) can provide extra income to working parents with a qualifying child because up to $1,500 of the credit is refundable. Likewise, the credit for increasing research activities offers extra money for businesses as an incentive for keeping research and development activities in the United States.<\/p>\r\n

Types of Tax Credits Available for Individual Taxpayers<\/h2>\r\n

There are several different federal tax credits available to individual taxpayers who qualify based on the taxable income reported on their federal income tax returns. Certain credits and deductions may only be available to low-income or moderate-income taxpayers. Eligibility for credits may depend on your tax filing status, income, and other factors. Some of the most common tax credits for individuals include:<\/p>\r\n