Tax Credits
Tax credits directly reduce tax liability dollar-for-dollar and are more valuable than deductions, which only reduce taxable income.
Explanation
Credits are either refundable (paid even if exceeding tax liability) or nonrefundable (limited to tax liability). Key individual credits include the child tax credit (partially refundable), earned income credit (refundable), education credits (American Opportunity is partially refundable, Lifetime Learning is nonrefundable), and child/dependent care credit. Business credits include the general business credit (a collection of credits with carryback/carryforward rules), the research credit, and the work opportunity credit.
Key Points
- •Refundable credits can generate a refund; nonrefundable credits are limited to tax liability
- •Child tax credit and earned income credit are key refundable credits
- •General business credit has a 1-year carryback and 20-year carryforward
Exam Tip
Credits reduce tax dollar-for-dollar, so a $1,000 credit saves more than a $1,000 deduction at any tax rate below 100%. Know which credits are refundable.
Frequently Asked Questions
Related Topics
Individual Taxation
Individual taxation covers the rules for computing taxable income, deductions, credits, and tax liability for individual taxpayers under the Internal Revenue Code.
Corporate Taxation
Corporate taxation covers the tax rules for C corporations, which are taxed as separate entities at a flat 21% federal rate under current law.
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