Tax Credits
Amounts that reduce tax liability dollar for dollar, sometimes refundable.
REG MCQs almost always hinge on refundable vs. nonrefundable: a nonrefundable credit can only zero out the tax, so the “tell” is a credit larger than the liability, and the answer caps the benefit at the tax and asks where the excess goes. Memorize the refundable short list—earned income credit, additional child tax credit (the refundable slice of the CTC), the American Opportunity credit (40% refundable, up to $1,000), and the premium tax credit—because everything else (foreign tax, lifetime learning, child/dependent care, general business credit) is nonrefundable. Watch the general business credit (GBC): under §39 it carries back 1 year, forward 20, and §38(c) limits it to net income tax minus the greater of tentative minimum tax or 25% of net regular tax liability above $25,000.
The classic trap is the examTip’s flip side—students treat a $1,000 credit and a $1,000 deduction as equal, but a deduction only saves tax at your marginal rate (e.g., $220 at 22%). Don’t confuse credits with the above-the-line deductions that build AGI or the standard/itemized choice below it; those shrink the base, while credits attack the computed tax at the very bottom of the return.
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