Tax credit directly decreases the tax liability of a taxpayer, unlike tax deductions which only reduce taxable income. A tax credit is subtracted from the tax liability itself. For example, a taxpayer with a tax liability of $10,000 with a tax credit of $1,500 would only owe $8,500 in taxes. A tax credit also may or may not be refundable, meaning that it can cause the taxpayer to receive money instead of paying taxes; non-refundable tax credits only will reduce the tax obligation to zero. For example, if Mary had a tax obligation of $1,000 and a refundable tax credit of $3,000, Mary would receive a $2,000 tax refund from the IRS. Popular examples of tax credits are the child tax credit, health insurance premium tax credit, and the energy efficiency tax credit.
[Last updated in October of 2021 by the Wex Definitions Team]