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Tax Credit

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A tax credit is a direct reduction in the amount of taxes owed by a taxpayer. For example, if a taxpayer owes $1,000 and is allowed to claim a $100 tax credit, the post-credit amount owed becomes $900. A tax credit is distinct from a tax deduction in that the latter reduces the amount of taxable income a taxpayer must report. Because taxes are calculated as a percentage of income or revenue, the size of a tax deduction would have to be larger in order to achieve the same dollar-for-dollar reduction in taxes owed as a tax credit. Consequently, tax accountants tend to view a tax credit as more valuable than a tax deduction. A wide variety of tax credit options are available to individuals and businesses. For example in 2009, the federal government established a temporary tax credit for first time home buyers. Other examples include the health care tax credit for small businesses, the earned-income tax credit, child care tax credit, and energy efficiency tax credit to homeowners offered by both the state and federal government.



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