Introduction to Tax Credits
How Tax Credits Work
Unlike deductions, which reduce taxable income, tax credits directly reduce the amount of tax owed. Because they provide a dollar-for-dollar reduction, credits are often the most valuable tax benefit available.
A $1 tax credit generally saves more tax than a $1 deduction.
- Credits reduce tax liability directly.
- Some credits are refundable.
- Some credits are nonrefundable.
- Many credits phase out as income increases.
Summary
Tax credits provide greater tax savings than deductions of the same dollar amount.