tax credit

A tax credit reduces the amount of tax you owe directly, dollar for dollar. For example, if you owe $1,000 in taxes and qualify for a $200 tax credit, your bill drops to $800. Unlike deductions that lower your taxable income, credits are applied after calculating your total tax liability, providing a more immediate benefit. Tax credits can be offered for various reasons, such as encouraging certain behaviors or supporting specific groups, like families or students. They help taxpayers keep more of their income by reducing the amount of taxes payable.