Definition

A tax credit directly reduces your tax bill, making it more valuable than a deduction of the same size. Nonrefundable credits can reduce tax only to zero, while refundable credits can produce a refund beyond what you paid in. Credits exist for things like child care, education, and certain energy investments.

1. Tax Deduction

   An expense that lowers the income you are taxed on.
2. Foreign Tax Credit

   A U.S. credit for income taxes paid to another country, reducing double taxation.
3. Marginal Tax Rate

   The tax rate applied to your next dollar of income.