Tax credit.
In plain English
A tax credit reduces the actual tax you owe, dollar for dollar. A $1,000 credit subtracts $1,000 from your tax bill, regardless of your bracket. Credits come in two flavors: nonrefundable (can reduce your tax to zero but no further) and refundable (can give you money back even if you owed nothing). The Earned Income Tax Credit, Child Tax Credit, and certain education and energy credits are common examples.
01Why it matters
Credits are far more valuable than deductions for the same dollar amount. A $1,000 deduction in the 22% bracket saves you $220. A $1,000 credit saves you $1,000. Refundable credits go further: if you only owed $400 in tax and qualify for a $1,000 refundable credit, you get a $600 refund check. Many people miss credits they qualify for simply because they don't know they exist.
02The math, step by step
A single parent earning $35,000 has two kids. Their pre-credit federal tax might be roughly $1,500. The Child Tax Credit (currently $2,000 per child, partially refundable) brings the bill to zero and may produce a refund of $1,400+ on top, depending on income and the refundable portion limits. The same parent without children would pay the full $1,500.
03What this is NOT
A deduction lowers your taxable income before tax is calculated. A credit lowers the tax itself. They both reduce what you owe, but credits do it much more efficiently. When you have a choice (rare), taking a credit usually wins.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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