Tax Credits

Tax credits are not the same as tax deductions. Tax credits are much more valuable for taxpayers because tax credits put money directly into taxpayers' pocket whereas tax deductions only reduce taxable income. For example, a taxpayer who never paid any taxes can file his or her tax return and get money from the IRS if he or she claims tax credits.

In comparison, a taxpayer with a large amount of tax deductions can never get any money from the IRS if he or she did not have taxes withheld. The most tax deductions can do for a taxpayer is to reduce the taxes he or she would have owed the IRS to nothing by means of reducing taxable income.

There are two types of tax credits; refundable tax credits and nonrefundable tax credits. Refundable tax credits are much more valuable to taxpayers than nonrefundable tax credits. Nonrefundable tax credits reduce the taxes owed to the IRS directly (while tax deductions reduce the taxable income not the actual taxes owed). If the nonrefundable tax credits are more than the taxes owed to the IRS, however, the taxpayer cannot receive a refund in excess of the taxes owed. In contrast, refundable tax credits will be refunded even if the refundable tax credits are more than the taxes owed to the IRS.

Below are some common tax credits that many taxpayers can and should take advantage of.

Earned Income Tax credit (EIC)

• Who Qualifies for Earned Income Credit?
  • Income Test for Earned Income Credit
  • EIC with a child
  • EIC without a child

Child and Dependent Care tax credit

• Who Qualifies for Child and Dependent Care Credit?

Child Tax Credits and Additional Child Tax Credits