Warning
Info
Warning
Info
Simple English definitions for legal terms
tax credit
Read a random definition: conclusion
A quick definition of tax credit:
A tax credit is a way to reduce the amount of taxes you owe. It's different from a tax deduction, which only lowers your taxable income. With a tax credit, the amount is subtracted directly from your tax bill. For example, if you owe $10,000 in taxes and have a tax credit of $1,500, you would only have to pay $8,500. Some tax credits can even give you money back if you don't owe any taxes. Popular tax credits include ones for having children, buying energy-efficient products, and paying for health insurance.
A more thorough explanation:
A tax credit is a type of tax benefit that directly reduces the amount of tax a person owes. Unlike tax deductions, which only reduce taxable income, tax credits are subtracted from the tax liability itself. This means that if a person owes $10,000 in taxes and has a tax credit of $1,500, they would only owe $8,500 in taxes.
Some tax credits are refundable, which means that if the credit exceeds the amount of tax owed, the taxpayer will receive a refund for the difference. For example, if a person owes $1,000 in taxes but has a refundable tax credit of $3,000, they would receive a $2,000 tax refund from the IRS.
Examples of tax credits include:
- Child tax credit
- Health insurance premium tax credit
- Energy efficiency tax credit
The child tax credit is a tax credit that parents can claim for each qualifying child. The credit is worth up to $2,000 per child and is partially refundable. This means that if the credit exceeds the amount of tax owed, the taxpayer may receive a refund for up to $1,400 per child.
The health insurance premium tax credit is a tax credit that helps people afford health insurance purchased through the Health Insurance Marketplace. The credit is based on income and household size and can be used to lower monthly premiums or to claim a refund on taxes.
The energy efficiency tax credit is a tax credit that incentivizes homeowners to make energy-efficient improvements to their homes. The credit is worth up to 10% of the cost of eligible improvements, such as insulation, windows, and doors.
Overall, tax credits are a valuable tool for reducing tax liability and increasing tax refunds. By taking advantage of available tax credits, taxpayers can keep more of their hard-earned money.