What is a tax credit?

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    A tax credit is when you get a dollar-for-dollar reduction in your tax bill. Tax credit is offered at both state and federal levels. Tax credits act as incentives to purchase certain items like buying an electric vehicle or even offset certain expenses like raising or adopting a child. 

    There are three kinds of tax credits: refundable, non-refundable, and partially refundable tax credits. A majority of them are non-refundable.

    Nonrefundable tax credits reduce your tax liability by the amount of tax credits you qualify for. For example, if you qualify for a $500 tax credit, your tax will be reduced by $500. Once the tax liability is zeroed, You won’t get any unused tax credit as a refund. 

    Refundable tax credits are when you have the chance of getting a refund on the overage if you owe fewer taxes than the credit amount. You not only reduce taxes but also get a refund. For example, you owe $500 but qualify for a $600 refundable tax credit. You can get the extra $100 as a refund.

    With a partially refundable tax credit, you can lower the taxes you owe by the tax credit limit. But if your tax bill is lower than the credit amount, you could get a partial refund for the remaining overage. For example, if you have a credit worth $500, and only $200 of that amount is refundable, your tax liability is reduced by $500 or you get up to $500 back as a refund if you owe less taxes.

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StellarFinance, Inc. and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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