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How Does a Tax Credit Affect My Taxes?

what does a tax credit do

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Saving money at tax time involves two basic approaches: making use of tax credits or using deductions. Credits are usually more advantageous because they come directly off your tax bill. A $1,000 tax credit is literally worth $1,000 to you. Deductions can only decrease the income you have to pay taxes on and your tax bracket affects them. If you're in a 28 percent tax bracket, a $1,000 deduction is worth $280 to you, because it reduces your income by $1,000. However, if you're in a 25 percent tax bracket, it's only worth $250.

How Credits Work

Credits are entered on the second page of your tax return if you file Form 1040. You subtract them after you determine your adjusted gross income on the first page -- all your

sources of income minus your available deductions. Your adjusted gross income is what you must pay taxes on. If your adjusted gross income is $100,000, you're in a 25 percent tax bracket and you'd typically have a tax bill of $25,000. If you're eligible for $6,000 in tax credits, your tax bill drops to $19,000.


The IRS isn't particularly generous with its credits if yours is not a low-income family. For example, if you earned more than $45,060 in 2012, or $50,270 if you file jointly with your spouse, you're not eligible for the earned income tax credit. An available credit for retirement savings contributions, as well as some education credits if you're paying tuition for yourself or a dependent, also phase out at higher income levels.

Refundable vs. Non-Refundable

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