A tax credit directly reduces the taxes owed on a dollar-for-dollar basis, unlike deductions that lower taxable income subject to prevailing rates.
Main Types:
- Refundable credits may exceed the tax liability and generate returns from the government
- Non-refundable credits only offset the balance due rather than circulating cash payments
- Transferable credits allow assignment of excess value to third parties
Example:
A family claimed the Child Tax Credit and Earned Income Tax Credit to reduce their joint tax burden.
Takeaways:
Credits facilitate social and economic incentives that deductions alone cannot. Their potentials depend on eligible expenditures, phaseouts, and transferability rules. Like deductions, credits require strict substantiation to claim worthier than outlay costs.