What is a Tax Credit?

by Lee Wyatt
(last updated August 23, 2013)

Tax preparers are more than used to answering the same questions over and over again. In fact, one of the more common questions that they probably have to answer is the rather simple question of: what is a tax credit? While you could always ask your tax preparer for the answer to this question, why risk distracting them when you can find the general answer to the question yourself? By knowing at least the basics about a tax credit, you can ask more pertinent and timely questions when you are able to have your tax preparer working with you to do your taxes.

  • Definition. The first place to begin with understanding tax credits is probably with the actual definition. In simplest terms, a tax credit is an item that is used to reduce the amount of tax that you pay. This is often confused with a very similar item that is known as a tax deduction.
  • Common usage. Tax credits are typically offered by the government in an attempt to help promote specific types of behaviors. Some recent examples of this was such programs where you can receive a tax credit for using more energy efficient appliances, or the "Cash for Clunkers" program from a few years ago. Another common type of tax credit that is used quite a lot today is the Earn Income Credit where (in laymen's terms) the tax that you pay is reduced due to the number of children that you have.
  • Common effect. The most common effect of tax credits is that the government is trying to encourage certain types of activities that they consider to be beneficial to the whole of society. This is typically a very effective method of promoting certain societal behaviors since the practice, in effect, is allowing the tax payer to have more access to their paychecks. Once again, a good example of this can be found in the Earned Income Credit, which is designed to promote people working at even low paying jobs since they will be able to take more of their paychecks home.
  • Should you use them? If you are looking for a quick and easy answer, then a tax credit is generally a good thing. However, before you begin applying for any specific types of tax credits, you really need to talk about their effect and impact on your tax ratings with your tax professional. You may not qualify for all the tax credits that are currently available, or even be aware of all of the ones that you may qualify for. This is where the tax preparer can come in handy and help you out.

Author Bio

Lee Wyatt

Contributor of numerous Tips.Net articles, Lee Wyatt is quickly becoming a regular "Jack of all trades." He is currently an independent contractor specializing in writing and editing. Contact him today for all of your writing and editing needs! Click here to contact. ...

MORE FROM LEE

Cleaning Oven Racks

These days it is extremely easy to clean your oven—after all most ovens are self-cleaning. There is one drawback to ...

Discover More

Increasing Productivity at Work

In today's ever competitive workplace it only makes sense that people would like to be as productive as possible. Increased ...

Discover More

Understanding the Basic Soil Types

One of the keys to getting really good at gardening or landscaping is that you need to know what type of soil you are working ...

Discover More
More Money Tips

What is Tax Planning?

Tax planning is a great way to minimize federal income tax liability. There are several legal methods of postponing income or ...

Discover More

Finding Tax Forms

The frustrating aspects of filing taxes is never alleviated by the fact that sometimes those tax forms you need are so hard ...

Discover More

What is the Inheritance Tax?

The people receiving the inheritance pay an inheritance tax. Each beneficiary is responsible for paying his or her own ...

Discover More
Comments

If you would like to add an image to your comment (not an avatar, but an image to help in making the point of your comment), include the characters [{fig}] in your comment text. You’ll be prompted to upload your image when you submit the comment. Images larger than 600px wide or 1000px tall will be reduced. Up to three images may be included in a comment. All images are subject to review. Commenting privileges may be curtailed if inappropriate images are posted.

What is 2 + 1?

There are currently no comments for this tip. (Be the first to leave your comment—just use the simple form above!)


Videos

Subscribe to the Tips.Net channel:

Visit the Tips.Net channel on YouTube