Definition
A dollar-for-dollar reduction of your tax bill, applied after the tax is calculated. Refundable credits can push the bill below zero and come back as a refund; nonrefundable credits can only shrink the bill to zero.
Why it matters
Credits are the most valuable line on a return because every credit dollar is a full dollar saved, regardless of your bracket. A deduction of the same size is worth only a fraction of that.
Example
A family owes $4,000 before a $1,000 credit: the bill drops to $3,000, a full $1,000 saved. A $1,000 deduction for the same family in the 22% bracket would have saved just $220. Same number on paper, nearly five times the difference in cash.
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.