A tax credit reduces the amount of taxes owed to the government. Tax credits shouldn’t be confused with tax deductions and exemptions, which reduce taxable income. Tax credits provide a dollar for dollar reduction in taxes owed, making them more favorable than deductions and exemptions.
Tax credits come in three types — nonrefundable, refundable, and partially refundable. Each type of credit will reduce your taxes. A nonrefundable credit can’t create a refund, while a refundable credit can create a refund. A partially refundable credit allows, in some cases, taking part of the credit as a refund.