question.jpgIn Federal Income Tax

What is a tax credit?

Once you have determined your tax liability using the tax tables or the Tax Computation Worksheet, and once you have also determined any alternative minimum tax you owe, you have an opportunity to lower your tax burden by claiming certain tax credits. Tax credits are more significant than deductions in the sense that they directly lower your tax burden (i.e., they are subtracted from the amount of tax you owe), while deductions only lower the amount of income used in determining your tax burden.

Generally, you can apply tax credits towards your taxes up to the full amount of your tax liability. If your credits exceed your liability, you are not generally entitled to a refund of the excess credit, although certain credits (such as the earned income credit, and the child tax credit, do allow for some refund).

The main tax credits you can claim include

1. The child tax credit and the additional child tax credit.

2. The child and dependent care credit.

3. The earned income credit.

4. The adoption credit.

5. The retirement savings contributions credit.

6. The education credits (the Hope credit and the lifetime learning credit).

7. The qualified electric vehicle credit.

8. The prior-year alternative minimum tax credit.

9. The elderly or disabled credit.

10. The foreign tax credit.

11. The tax on undistributed capital gains on mutual funds credit.

12. The excess withholding of Social Security or Railroad Retirement credit.