Tax Credit
A tax credit provides a dollar-for-dollar reduction in a person’s tax liability (the amount of taxes that a person owes).
Example: If Ed owes $1,000 in income taxes and is eligible for a $750 tax credit, the amount of taxes he owes is reduced to $250. If Ed owes $500 in income taxes and is eligible for a $750 tax credit, the amount of taxes he owes is reduced to $0.
Refundable Tax Credit
A refundable tax credit provides a reduction in a person’s tax liability, plus refunds the remainder if it exceeds the amount of taxes owed.
Example: Ellen owes $500 in income taxes and is eligible for a $1,000 tax credit. With a refundable tax credit, the amount of taxes she owes is reduced to $0 (like a regular tax credit) and Ellen will also be refunded the remaining $500.
Partially Refundable Tax Credit
A partially refundable tax credit is a hybrid. Like both a regular and refundable tax credit, it can reduce tax liability to $0. In addition, a taxpayer is refunded a portion of the remaining credit, determined by a combination of the person’s income and the amount of the credit that remains.
Example: Juan owes $500 in income taxes and is eligible for a $1,000 tax credit. With a partially refundable tax credit, he owes $0 (like a regular tax credit) plus Juan will be refunded a portion of the remaining $500 based on his income.
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