Credits vs. Deductions
“Credits vs. Deductions”
A tax credit directly reduces a tax liability on a dollar-for-dollar dollar basis, which means it is usually more valuable than a tax deduction of the same dollar amount that only reduces the amount of taxable income various types of tax credits are either refundable or non refundable.
Refundable Credits typically reduces a taxpayer’s liability to zero and also generates a refund to the taxpayer for the amount by which the credit exceeds the amount of tax you would otherwise owe!
Refundable Credits Include:
- Additional Child Tax Credit
- Earned Income Tax Credit
- Premium Tax Credit
Non-refundable credits can reduce a taxpayer’s liability to zero but not beyond that, so any remaining credit is not refunded to the taxpayer.
Non-Refundable Credits Include:
- Retirement Savings Contributions Credit
- Lifetime Learning Credit
- Credit for Child and Dependent Care Expenses, etc.
When looking at what credits or deductions you qualify for this year, you might want to keep in mind that a lot of credits and deductions are designed to phase out based on your level of income.