Tax Credit

A credit or tax credit is an amount that taxpayers can deduct from their final tax liability owed to the Internal Revenue Service or state taxing authority. Since a credit reduces a taxpayer's actual tax liability whereas standard and itemized deductions reduce a taxpayer's taxable income, a credit is more valuable to a taxpayer than an equal amount of deductions.

Credits are commonly granted to taxpayers to encourage certain behavior, such as purchasing a motor vehicle that runs on a fuel other than gasoline or to provide assistance to those with low income such as the elderly. It is possible for a taxpayer to have enough credits to reduce their tax liability to zero or in the case of some tax credits actually receive a refund. Credits that cannot be refunded to the taxpayer can be carried forward and applied to the taxpayer's tax liability the following tax year.