- A tax credit worth $1,000 reduces the amount of tax owed by $1,000–the same dollar amount.
- A tax deduction worth the same amount ($1,000) only saves you $330, however (0.22 x $1,000 = $220). As you can see, tax credits save you more money than tax deductions.
Tax Credits: Refundable vs. NonrefundableA refundable tax credit not only reduces the federal tax you owe but also could result in a refund if it more than you owe. Let’s say you are eligible to take a $1,000 Child Tax Credit but only owe $200 in taxes. The additional amount ($800) is treated as a refund to which you are entitled. A nonrefundable tax credit, on the other hand, means you get a refund only up to the amount you owe. For example, if you are eligible to take an American Opportunity Tax Credit worth $1,000 and the amount of tax owed is only $800, you can only reduce your taxable amount by $800–not the full $1,000. Refundable Tax Credits
- The Earned Income Tax Credit
- The Child and Dependent Care Credit
- The Saver’s Credit
- Adoption Tax Credit
- Foreign Tax Credit
- Mortgage Interest Tax Credit
- Residential Energy Property Credit
- Credit for the Elderly or the Disabled
- Child Tax Credit (tax years prior to 2018)
- Child Tax Credit (starting in 2018)
- American Opportunity Tax Credit
Questions about tax credits or deductions?If you have any questions or would like more information about either of these tax topics, please call.
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.