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.