What are the different types of tax credits?There are a whole slew of tax credits available for all kinds of taxpayers. Some are refundable, some are non-refundable, some are partially refundable.
- If a refundable tax credit is more than your amount owed in taxes, you will pay nothing and the government will pay you the difference.
- If a non-refundable tax credit is more than your amount owed in taxes, you will pay nothing and will not receive the difference.
- Partially refundable tax credits are rare. Some tax credits, like the AOTC, have refunds based on the total amount of taxes you owe.
So, how do you know which ones are available for you? The IRS has a complete list of available credits (and deductions – we’ll get to that in a minute).
Will a tax credit give me money?
Here’s the burning question – how much is a tax credit worth? And do you get money from it? In short, a tax credit will reduce your total amount owed in taxes.
Sometimes – like with a refundable or partially refundable tax credit – this results in a check from the government. In that case, yes, you get money from it. Some credits simply eliminate your debt. Some credits reduce the amount you have to pay.
How is a tax credit different than a deduction?
The difference between a credit and a deduction is subtle.
- A tax credit reduces your total amount owed in taxes. If you have a credit of $500, your taxes will be lowered by $500.
- A tax deduction makes it so that less of your income is subject to taxes. Your taxable income is lowered by the percentage of your federal tax bracket. If you’re in the 12% bracket, a $1,000 deduction will take $120 off your amount owed in taxes.
Which tax credits can I claim?
It varies from person to person. Some of the more popular credits are: