Tax Credit

A tax credit is often more valuable than a deduction of the same size. A deduction reduces the income on which tax is calculated, so its value depends on the tax rate. A credit reduces the tax itself.

For example, consider a taxpayer in a 20% bracket. A deduction of 1,000 lowers their taxable income by 1,000 and saves 200 of tax. A credit of 1,000 saves the full 1,000.

Governments use tax credits to support particular groups or encourage certain activities, such as raising children, working on a low income, paying for education, buying energy-efficient equipment or doing research and development.

Tax credits come in two main types. A non-refundable credit can reduce tax to zero but no further; any unused part is lost. A refundable credit can result in a payment from the government if the credit is larger than the tax owed. For example, someone who owes 600 of tax but qualifies for a refundable credit of 1,000 would receive 400 back.

Eligibility rules, amounts and types of credit vary widely by country and change over time.