Tax credits are a type of tax incentive designed to encourage certain behaviors or activities by reducing an individual’s tax liability. Tax credits are typically more beneficial than tax deductions, as they reduce the actual amount of tax owed rather than just reducing taxable income.

Tax credits can be refundable or nonrefundable. Refundable tax credits can reduce the tax liability to zero and may even result in a refund if the credit exceeds the tax owed. Nonrefundable tax credits can only reduce a taxpayer’s tax liability to zero; they cannot result in a refund.

Examples of tax credits include the earned income tax credit, child tax credit, education tax credits, and renewable energy tax credits. Tax credits are designed to help individuals and businesses save money on taxes while promoting behaviors or activities that benefit society as a whole.

It is important to understand the eligibility requirements and rules associated with each tax credit to take full advantage of available tax savings.