Answer
The tax payer can deduct a certain amount from taxes owed to the government. This amount of money is known as the tax credits. A tax credit depends on the course of credit, provided to an individual or a business entity.
Work Step by Step
Tax credits are the credits provided by the government to an individual or business firm from the taxable amount. By reducing these credits from the taxable income, one gets the benefit of the taxes paid. There are three types of tax credits:
1) Non-refundable tax credit
2) Refundable tax credit
3) Partially refundable tax credit
Non-refundable tax credit:
A taxpayer claims for this amount against its liability of tax. These credits can be reduced from the liability of tax until it becomes zero. The benefit of these credits can be claimed in the same financial year only. Once the return is filed, it can’t be claimed. It gives a negative effect on low income taxpayers as they are not able to utilize the entire amount of credit. Benefits for adoption, foreign income earnings, raising children are some of the examples of non-refundable tax credits.
Refundable tax credit:
Unlike, non-refundable tax credit, these credits are more beneficial as they are fully refundable. Even these credits give full benefit to the low taxpayers, as the amount can reduce to below zero. When the credit reduces the taxable amount below zero, a person is due for refund. Education, healthcare are some areas where these credits are available.
Partially refundable tax credit:
Some credits are partially refundable, which means that they can be partially used and not the full amount of these can reduce taxable income. These can reduce both taxable income and liability of tax.
