Tax Credits

A tax credit reduces the amount of tax which you owe. Unlike a tax deduction, which reduces the amount of income subject to tax, a tax credit directly reduces your tax liability. Since a tax credit usually reduces your liability dollar-for-dollar while a deduction only saves you the amount of the deduction times your tax rate, a tax credit is typically more valuable than a tax deduction of the same dollar amount.

Some tax credits (business credits) are only available to someone engaged in a trade or business, while other tax credits (personal credits) are specifically meant for individual taxpayers.

Tax credits also can be divided into two separate types of credit: refundable and nonrefundable.