Tax credits : Within the Australian , Canadian , United Kingdom , and United States tax systems, a tax credit is an item which is treated as a payment already made towards taxes owed. A similar concept exists under different names in the French tax system . It reduces tax liability unit-for-unit, in contrast to a tax deduction , tax allowance or tax relief which reduce taxable income .
Tax credits may be characterized as either refundable or non-refundable , or equivalently non-wastable or wastable . Refundable or non-wastable tax credits can reduce the tax owed below zero, and result in a net payment to the taxpayer beyond their own payments into the tax system, appearing to be a moderate form of negative income tax . Examples of refundable tax credits include the earned income tax credit and the additional child tax credit in the US, and the working tax credits or child tax credits in the UK.
A non-refundable or wastable tax credit cannot reduce the tax owed below zero, and hence cannot cause a taxpayer to receive a refund in excess of their payments into the tax system. Some examples of non-refundable tax credits are the Hope and Lifetime Learning educational tax credits in the US or the former children's tax credit in the UK. Another example would be declared gifts made to registered charities in the UK under the current Giftaid scheme, which attract tax relief (claimed by the charity) at the standard rate but which cannot reduce the donor's liabilty beyond the amount of tax actually paid by them in a given year |
