Tax credits are a type of tax benefit that lower your income tax bill and, in some cases, increase your tax refund. There are several different tax credits available to taxpayers. Each tax credit has a unique set of qualifications, and the amount you can receive for a credit may be fixed, or it may depend on factors like income and number of dependents.
How does a tax credit work?
Let’s say you owe $2,000 for federal income taxes and you claim a $1,000 tax credit. The tax credit reduces your tax bill dollar for dollar. So now, instead of having a liability of $2,000, you owe $1,000.
$2,000 (tax bill) – $1,000 (tax credit) = $1,000 (remaining balance)
Can a tax credit increase your refund?
If a tax credit is refundable, it can increase your refund. Refundable credits lower your tax bill, just like the example described above. And, if your liability goes to $0 or you don’t owe anything at all, the remaining credit balance comes back to you in your refund.
Common U.S. tax credits
|2021 Expanded Child Tax Credit||Up to $3,600 per child under age 6, and up to $3,000 per child age 6-17||Yes|
|Child Tax Credit||Up to $2,000 per child||Partially refundable up to $1,400|
|Credit for other dependents||$500 per dependent||No|
|American Opportunity Tax Credit||Up to $2,500 per year for four years||Partially refundable up to $1,000|
|Lifetime Learning Credit||Up to $2,000 for unlimited years||No|
|Child and Dependent Care Credit||Up to $8,000 per child or $16,000 for two or more dependents||Yes|
|The Retirement Contribution Savings Credit||50%, 20%, or 10% of your contribution||No|
|Earned Income Tax Credit (EITC/EIC)||Up to $6,660||Yes|
What makes a tax credit different from a tax deduction?
Tax deductions are used to reduce your taxable income. Your taxable income is what is used to calculate your tax bill. Once your tax bill is calculated, tax credits can reduce the amount you owe.
Read also: What are tax credits and tax deductions?
How do I claim tax credits?
When you file your taxes using TaxSlayer, we help you find the credits (and deductions) you are eligible to claim. You enter your personal info, your income and expenses, and TaxSlayer does the rest. Create your TaxSlayer account now and start filing for free!