A tax credit is an amount of money that taxpayers can subtract from what they owe the government
Why It's Important
You have probably heard a lot about tax deductions and tax credits during tax season, so I wanted to debunk what they are. I will cover deductions next week. Tax credits are available for anything from going to school to making energy efficient upgrades to your home and many things in between.
As I mentioned, tax credits lower the amount of tax you owe so, what if you don't have a tax liability (owe)? Well, there are two different types of tax credits.
Non-refundable tax credits, like mortgage interest and adoption, do not apply if your tax liability is 0.
Refundable tax credits, like the earned income tax credit, still apply even if it lowers your tax liability to below 0. Refundable tax credits are the most beneficial because you get the full dollar amount regardless of your tax liability or income, therefore, raising your refund!
Also, there are a few tax credits, like the American Opportunity Tax Credit, that are partially refundable. This means if your liability is 0, these credits will be applied at a certain percentage. You don't get the whole thing!