Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Tax Credit

What it is:

A tax credit is permission to reduce the amount of income that is subject to tax. A tax credit is not the same as a tax deduction.
 

How it works (Example):

For example, the Internal Revenue Service’s child tax credit allows taxpayers to reduce their federal income taxes by a fixed amount for each qualifying child. A qualifying child is a dependent under 17 who is a U.S. citizen or a resident alien. The child must be the taxpayer’s son, daughter, adopted child, grandchild, stepchild, eligible foster child, sibling, stepsibling or descendant. The child must live with the taxpayer for more than one-half of the tax year. In many cases, divorced parents decide which parent receives the child credit.

The child tax credit is not a tax deduction, it is a credit. That means it is a dollar-for-dollar reduction in your tax bill rather than a reduction in your taxable income.

Why it Matters:

Tax credits obviously lower a person’s tax bill, which is why taxpayers invest time in seeking out credits and structuring transactions to maximize those credits. There are several different types of tax credits, though some are only available to people in certain income ranges (typically under $100,000-$150,000) and most are only available to people in certain circumstances or companies in certain industries.