tax credit
An amount taken straight off the tax you owe.
A direct reduction of tax liability, as distinct from a reduction of the base.
What that means in practice
A deduction lowers the income you are taxed on. A credit is different. It comes off the bill itself. So a dollar of credit is worth a dollar to everyone, whatever they earn. Some credits are refundable and can pay you past zero. Most are not, and simply stop once your bill reaches nothing.
Credits reduce liability dollar for dollar and are therefore worth the same to all taxpayers who can use them, unlike deductions whose value scales with marginal rate. ⚠️ Refundability is the critical distinction: a nonrefundable credit is limited to liability and is worthless to a taxpayer already at zero, which excludes precisely the lowest-income households.
Questions people ask
Who decides this — the federal government or my state?
Each level sets its own. tax credit federally and tax credit in your state are separate rules. They just share a label. That is why the two returns rarely agree.
Is this one of those terms that needs three other terms to explain it?
Less than most. tax credit stands on its own. Start here rather than coming back to it later.
I have seen this called something else. Is it the same thing?
Very likely the same rule. Several names point at tax credit, depending on whether you met it on a form, from an employer or in the news.
At which level of government is this determined?
Income tax concepts are defined independently at federal and state level. States may conform to the federal definition, conform selectively, or define their own; conformity is legislated and can be static (tied to a fixed date) or rolling. ⚠️ A federal change therefore propagates to some states automatically and to others only by subsequent state action.
Does this term resolve independently?
This term resolves largely independently of other defined terms, with limited cross-references. It is therefore usable as an entry point; more heavily cross-referenced provisions generally require it rather than the reverse.
What alternative designations refer to this concept?
This concept is referred to by multiple designations across statutory text, agency guidance, payroll documentation and common usage. The alternatives are enumerated on this page. ⚠️ Terminology divergence is a frequent source of error where a statutory term and its colloquial equivalent are not exactly co-extensive.