Payroll Dictionary
Credits against tax
A credit against the tax, or a tax credit, is an amount that is subtracted from the income tax liability of a taxpayer in a given taxable year. The tax credit differs from a deduction in that the credit is subtracted from the tax itself, resulting in a dollar-for-dollar reduction in the tax liability; the deduction is subtracted from either gross income or adjusted gross income, resulting in a reduction in the amount of income subject to tax. A nonrefundable credit is one that cannot be refunded to the extent that it exceeds the income tax of the current year (e.g., the investment credit). A refundable credit can be refunded to the extent that it exceeds tax liability (e.g., the earned income credit).