Tax Credits

Concept

Credits vs. Deductions

A tax CREDIT directly reduces tax liability dollar-for-dollar. A $1,000 credit saves $1,000 in taxes. A deduction only reduces taxable income — a $1,000 deduction saves $1,000 × your marginal rate. Credits are always more valuable than equal-dollar deductions.

Example

Key Credits

Child Tax Credit: up to $2,000 per qualifying child. Earned Income Tax Credit (EITC): refundable credit for low-to-moderate income workers. American Opportunity Credit: up to $2,500 per student for first 4 years of college (partially refundable). Lifetime Learning Credit: up to $2,000 per return.

Key Point

Refundable vs. Non-Refundable

Refundable credits can generate a refund even if the taxpayer owes no tax (e.g., EITC, 40% of American Opportunity). Non-refundable credits can only reduce tax to zero but not below (e.g., Lifetime Learning Credit).

Above & Below the Line Deductions

Capital Gains & Losses

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Practice questions from this module to reinforce what you learned.

Practice Questions