A tax credit is an amount that directly reduces the taxes you owe. Unlike a tax deduction, which lowers taxable income, a tax credit lowers your tax bill dollar-for-dollar.
Types of Tax Credits
- Non-refundable credits: Reduce your tax owing to zero but cannot create a refund.
- Refundable credits: Can reduce your tax below zero, resulting in a refund.
Examples
- Basic personal amount: A non-refundable credit that reduces taxes for all individuals.
- GST/HST credit: A refundable credit for low- and middle-income households in Canada.
Final Thoughts
Tax credits are powerful tools for reducing your tax bill. Understanding the difference between refundable and non-refundable credits helps you maximize their benefits.