A tax credit is a dollar-for-dollar reduction of your income. For example, if your total tax on your return is $1,000 but are eligible for a $1,000 tax credit, your net liability drops to zero. Some credits, such as the earned income credit, are refundable, which means that you still receive the full amount of the credit even if the credit exceeds your total tax bill. Therefore, if your total tax is $400 and you claim a $1,000 earned income credit, you will receive a $600 refund.
Tax credits are generally considered to be better than tax deductions because they directly reduce the amount of tax you owe. The effect of a tax deduction on your tax liability depends on your marginal tax bracket.
A tax credit is a dollar-for-dollar reduction of your income. For example, if your total tax on your return is $1,000 but are eligible for a $1,000 tax credit, your net liability drops to zero. Some credits, such as the earned income credit, are refundable, which means that you still receive the full amount of the credit even if the credit exceeds your total tax bill. Therefore, if your total tax is $400 and you claim a $1,000 earned income credit, you will receive a $600 refund.
Tax credits are generally considered to be better than tax deductions because they directly reduce the amount of tax you owe. The effect of a tax deduction on your tax liability depends on your marginal tax bracket.