Tax Credit
A dollar-for-dollar reduction of tax liability, more valuable than a deduction of equal size since deductions only reduce taxable income.
Detailed Explanation
Tax credits are categorized as nonrefundable (limited to tax owed) or refundable (paid to the taxpayer even if the credit exceeds tax owed). Major federal credits include the Child Tax Credit, Earned Income Tax Credit, American Opportunity Credit, Lifetime Learning Credit, Saver's Credit, Premium Tax Credit (ACA), Foreign Tax Credit, and various energy credits. State tax codes also offer credits. Credit eligibility depends on income, filing status, and specific qualifying activities or expenses.
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Learn about Tax Planning & StrategyRelated Terms
Tax Deduction
An amount subtracted from gross income to reduce taxable income, lowering tax liability by the deduction amount multiplied by the marginal tax rate.
Foreign Tax Credit (FTC)
A dollar-for-dollar credit on the US tax return for income taxes paid to a foreign country, designed to prevent double taxation.
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