Tax credit
A tax credit is an amount subtracted directly from the tax you owe, lowering it dollar for dollar. Most credits can reduce your tax only to zero, but a refundable credit can be paid to you even when you owe no tax.
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How it works
Credits come after the bracket math. Deductions shrink your income, the brackets turn taxable income into a tax figure, and credits are then subtracted from that figure. Because of that order, a $1,000 credit you can fully use is worth $1,000 whatever your bracket, while a $1,000 deduction is worth only the tax those dollars would have drawn, such as $120 at a 12% rate.
What happens when a credit is larger than your tax depends on its type. A nonrefundable credit can bring the tax down to zero but not below it. A refundable credit, such as the earned income tax credit, can be paid out even if you owe nothing. Some credits are partly refundable, so only part of the credit can go beyond your tax.
Eligibility often depends on details such as income, filing status, a qualifying child or other person, or a specific expense, and the rules can change from one tax year to the next. The maximum amount of a credit is not what every filer receives. The IRS instructions for a specific credit and tax year set out who qualifies and how much can be claimed.
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Sources and further reading
Examples are illustrative and focus on U.S. personal finance. This page is educational, not individual financial, investment, tax, or legal advice. Read our editorial approach or report a correction.