Similar to tax deductions, tax credits help taxpayers reduce the tax bill. However, tax credits are different from deductions, since they do not reduce the amount of taxable income. Instead, tax credits reduce the actual amount of tax owed to the government. The value of a tax credit is decided by several factors, including specific locations, classifications, or industries where the individual or business is.
The purpose of government granting tax credits is to promote a specific behavior of businesses or to help disadvantaged individuals by cutting the total cost of housing for them. In general, tax credits are favored over tax deductions or exemptions, because tax credits reduce the tax bill dollar-for-dollar. In comparison, even though tax deductions or exemptions reduce the final tax liability, they do so within the taxpayer’s marginal tax rate. In other words, the deducted amount is subject to the tax bracket. For instance, in a 22% tax bracket, $0.22 for every marginal tax dollar deducted could be saved for the individual. But a tax credit could cut the tax liability by the full $1, which means people do not need to pay the part of taxes subtracted from the original by using tax credits.
How can you earn tax credits? Basically, tax credit is designed to help taxpayers who has trouble in paying taxes, either because of low income or other reasons. Thus, you need to meet certain requirements. For example, if you get a low to moderate income, the Earned Income Tax Credit (EITC) may suit you. To qualify, you must prove that you are eligible and file a tax return even though you owe no tax or are not required to file. If EITC reduces your tax to below zero, you may get a refund. Besides, there are various tax credits available, such as Family and Dependent Credits, Education Credits, Income and Savings Credits, Homeowner Credits, Health Care Credits. You can find further information on the website of the Internal Revenue Service if you need.