Tax credit - Definition and Overview

Within the United States' tax system, a tax credit is an item which is treated as a payment already made toward taxes owed. It has the effect of reducing tax liability dollar-for-dollar, in contrast to a tax deduction which reduces taxable income, not tax liability.

Tax credits may be characterized as refundable or non-refundable. Refundable tax credits can reduce the tax owed below zero, and result in a net payment to the taxpayer beyond their own payments into the tax system. An example of a refundable tax credit is the additional child tax credit.

A non-refundable tax credit cannot reduce the tax owed below zero, and hence cannot cause a taxpayer to receive a refund in excess of their payments into the tax system. Some example of non-refundable tax credits tax credits are the Hope and Lifetime Learning educational tax credits.