Definition of Tax Credit
When filing taxes, you want to ensure that you take any tax credits and deductions for which you are eligible. A tax deduction is a deduction that you take to lower your gross (taxable) income. A tax credit directly reduces your tax liability (the amount you owe). Typically, a tax credit can save you far more than a deduction.
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Refundable Tax Credits
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Refundable tax credits allow you to claim the tax credit in full, even if the amount exceeds the amount you owe in taxes. The government then reimburses you for the difference. Some refundable tax credits include the Earned Income Credit, the Excess Social Security Credit, the Additional Child Tax Credit and the Health Coverage Tax Credit.
Nonrefundable Tax Credits
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Most tax credits are nonrefundable, which means that you can only take the credit in full if it does not reduce your liability to less than zero. Otherwise, you can take a portion of the tax credit. For example, if the credit is for $4,000 but your tax liability is $3,000, you can only take a credit of $3000.
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Child Tax Credit
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The Child Tax Credit is one of the most common tax credits for parents with children under the age of 18.
Making Work Pay Tax Credit
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The Making Work Pay Tax credit is the latest tax credit; it is available for those in the low- to middle-income brackets.
Other Tax Credits
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The Adoption Credit, Foreign Tax Credit, Education Credits, Child and Dependent Care Credit, Credit for the Elderly or Disabled, Residential Energy Credit and the Retirement Savings Contribution Credit are the other nonrefundable credits.
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