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Tax Credit
Definition
A direct dollar-for-dollar reduction in the amount of taxes owed.
Explanation
Tax credits reduce tax liability dollar-for-dollar, unlike deductions which reduce taxable income. A $1,000 tax credit saves $1,000 on your tax bill. Common credits include the Child Tax Credit ($2,000 per child) and Earned Income Tax Credit.
Some credits are refundable (you get money back even if the credit exceeds taxes owed) while others are non-refundable (can only reduce tax to zero).
Example
You owe $5,000 in taxes and qualify for a $2,000 Child Tax Credit. Your final tax bill is $3,000.