What Is a Tax Credit?
A tax credit is an amount subtracted directly from the tax owed, rather than from income. A 1,000 credit reduces a tax bill by 1,000. Refundable credits can produce a refund even if they exceed the tax owed; nonrefundable credits can only reduce the tax to zero.
Tax Credit vs. Tax Deduction
A deduction lowers taxable income, so its value depends on the taxpayer's marginal rate: a 1,000 deduction at a 22% rate saves about 220. A credit lowers the tax itself, so a 1,000 credit saves 1,000.
Refundable vs. Nonrefundable
With a refundable credit, any amount left after tax reaches zero is paid out as a refund. A nonrefundable credit simply stops at zero tax.
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🔗 Related Terms
More Taxes Terms
- Additional Medicare Tax
- Adjusted Gross Income (AGI)
- Alternative Minimum Tax (AMT)
- Capital Gains Tax
- Capital Loss
- Child Tax Credit
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Last updated: September 27, 2026. This definition is for general educational purposes only. It is not financial, investment, tax, legal, or medical advice, and it does not recommend any product or course of action. For decisions about your own situation, consult a qualified professional.