Tax Credits

Tax credits directly reduce the amount of tax you owe, dollar for dollar. For example, if you owe $1,000 in taxes and you have a $300 tax credit, your tax bill drops to $700. There are different types of tax credits:

• Refundable Tax Credits: If these credits reduce your tax bill to below zero, you get a refund for the difference. For example, if your tax bill is $500 and you have a $700 refundable tax credit, you get a $200 refund.
• Non-Refundable Tax Credits: These can reduce your tax bill to zero, but no further. If you have a $1,000 non-refundable credit and your tax bill is $600, it just reduces your bill to zero, and you don’t get the remaining $400 back.

Tax Exemptions

Tax exemptions reduce your taxable income, which means you’re taxed on a smaller amount of money. For example, if you earn $50,000 a year and have a $5,000 tax exemption, you’ll only be taxed on $45,000. Common tax exemptions include:

• Personal Exemptions: These apply to you and your dependents. However, starting in 2018, the personal exemption has been eliminated for federal taxes under the Tax Cuts and Jobs Act.
• Dependent Exemptions: Previously allowed you to claim an exemption for each dependent, but like personal exemptions, this has also been eliminated under current tax law.