Definition of Credits

Credits differ from deductions in that credits are a direct reduction of your taxes. Deductions are a reduction in your taxable income. Credits are classified as non-refundable or refundable credits.

Non-refundable credits will lower your tax liability, but cannot exceed the total amount of your taxes. The Child and Dependent Care Credit, education credits, Credit for the Elderly or Disabled, and the Child Tax Credit are the most common examples of these credits. Certain energy credits are also non-refundable credits.

A refundable credit means that the credit is treated as a payment of tax. If the total of these credits, withheld federal income tax, and estimated tax payments is more than your total tax, you will receive a refund for the difference. The Earned Income Credit and the Additional Child Tax Credit are refundable credits.

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