A tax credit is a reduction in the amount of tax you owe, directly lowering your tax bill.
Unlike a tax deduction, which reduces taxable income, a tax credit provides a dollar-for-dollar (or franc-for-franc) reduction in your total tax liability. This makes tax credits highly valuable, as they directly decrease the amount of tax due rather than just adjusting taxable income.
There are two main types of tax credits: refundable and non-refundable.
Refundable tax credits can reduce your tax liability to below zero, meaning you receive the excess amount as a refund.
Non-refundable tax credits can only reduce your tax bill to zero but do not provide any additional payout beyond that.
Some tax systems also offer partially refundable credits, where a portion of the credit can be refunded even if no tax is owed.
Tax credits are often designed to encourage specific behaviours or provide financial relief to certain groups. Governments use tax credits to support families, promote education, incentivise investment in certain sectors, and assist low-income earners.
Examples of common tax credits include child tax credit and education credits.
The impact of a tax credit depends on individual circumstances and the tax system in place. Therefore, it is important to do your own research into whether you may be eligible.