Unlike income tax deductions, which reduce your taxes by reducing your taxable income, tax credits offer a straight up, dollar-for-dollar reduction of your tax bill. In other words, a $500 tax credit will reduce your tax bill by $500. In contrast, a $500 tax deduction will reduce your tax bill by anywhere from $50-$175 (depending on your income tax rate). Better still, many tax credit are “refundable,” which means that you can take advantage of them even if you don’t owe any taxes.
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