Credits

A tax credit reduces the amount of tax for which you are liable. Unlike a deduction, which reduces the amount of income subject to tax, a tax credit directly reduces your tax liability, dollar for dollar. A tax credit is usually more valuable than a tax deduction of the same dollar amount. There are two categories of tax credits, refundable and nonrefundable. A nonrefundable credit can reduce your tax liability to zero (0), but not below. A refundable tax credit is a tax credit that can reduce your tax liability below zero and the amount in excess of the liability is refunded to you.