Tax Credits

Tax credits directly reduce the amount of tax you owe, making them more valuable than deductions. They come in two categories: nonrefundable and refundable.

Types of Tax Credits:

  • Child Tax Credit: Available to parents with dependent children, reducing the tax owed per qualifying child.
  • Earned Income Tax Credit (EITC): Designed to benefit low- to moderate-income working individuals or families, the EITC can significantly reduce tax liability.
  • Education Credits: Credits like the American Opportunity Credit or Lifetime Learning Credit help offset costs of post-secondary education.
  • Energy Efficiency Credits: Offered for making energy-efficient improvements to your home, such as installing solar panels.

Nonrefundable vs. Refundable:

  • Nonrefundable: These credits can reduce your tax liability to zero but not below it.
  • Refundable: These can result in a refund if they exceed your total tax liability.

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FAQs

What is a tax credit?

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A tax credit is an amount that reduces your tax liability dollar for dollar.

How do I qualify for tax credits?

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Qualification for tax credits varies by credit type and often depends on income and specific circumstances.

Can tax credits be carried forward?

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Some tax credits can be carried forward to future tax years if not fully utilized.

Are tax credits the same as deductions?

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No, tax credits reduce your tax bill directly, while deductions reduce your taxable income.

How do I claim tax credits?

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You can claim tax credits on your tax return by filling out the appropriate forms.

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