Small Business Tax Dictionary

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Tax Credit

A tax credit is a direct reduction in tax liability, allowing taxpayers to offset the amount of taxes they owe. Tax credits can be applied to various activities or expenses, such as education costs, energy-efficient home improvements, or child care. Tax credits may be refundable, meaning that if the credit exceeds the tax liability, the taxpayer receives the excess amount as a refund. Non-refundable credits, on the other hand, can only reduce tax liability to zero, with no refund of any remaining credit. Understanding and utilizing available tax credits can lead to significant tax savings and support various social and economic goals by incentivizing specific behaviors or expenditures.