Tax credit

A tax credit is a tax incentive which allows certain taxpayers to subtract the amount of the credit from the total they owe the state. It may also be a credit granted in recognition of taxes already paid, or (as in the UK) a form of state support for low earners.

Incentive tax credits may be used to encourage behaviors like investment or parenting. A credit directly reduces tax bills, unlike tax deductions and tax exemptions, which indirectly reduce tax bills by reducing the size of the base (for example, a taxpayer's income or property value) from which the tax bill is calculated.

Most tax credits are nonrefundable tax credits, meaning that they can only be used to the point at which no more taxes are owed. However, some tax credits are refundable tax credits, meaning that if the credit exceeds the amount of taxes owed, the excess is returned to the taxpayer.

Credit for payments

Many systems refer to taxes paid indirectly, such as taxes withheld by payers of income, as credits rather than prepayments. In such cases, the tax credit is invariably refundable. The most common forms of such amounts are payroll withholding of income tax or PAYE, withholding of tax at source on payments to nonresidents, and input credits for value added tax.