Q&A: What is a tax credit?

A tax credit is an amount of money that taxpayers can subtract from the taxes they owe to their government. Unlike deductions and exemptions, which reduce the amount of taxable income, tax credits reduce the actual amount of tax owed.

Tax credits are usually created to incentivize a certain behavior. For example, the Retirement Savings Contributions Credit (Saver’s Credit) is designed to incentivize saving for retirement and the Earned Income Tax Credit (EITC) is designed to incentivize earning income.

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