Video: What Are Tax Credits?

Updated for Tax Year 2021 • October 16, 2021 07:00 AM


Tax credits are one of the most valuable tax-saving tools you can use.

Video transcript:

Hello, I'm Sara from TurboTax with important news on how you can save money with a tax credit.

Tax credits are one of the most valuable tax saving tools you can use because they reduce the amount of tax you owe on a dollar for dollar basis.

It works like this:

Suppose you prepare your tax return and owe $5,000. If you qualify for a $2,000 tax credit, then you will only owe $3,000. A $2,000 tax credit provides more savings than a $2,000 deduction. Assuming you deduct the $2,000 from income being taxed at 25%, your savings is only $500, so in essence, a $500 tax credit provides the same tax savings as a $2,000 deduction.

Some of the tax credits offered may even be refundable. What this means is that the credit can create a tax refund for you. If you only owe $300 in tax but are eligible for a $1,000 refundable tax credit, then you should be on the lookout for your $700 refund check.

To really maximize your tax savings this year, you should check and see what tax credits your state allows as well since 23 states plus the District of Columbia offer them.

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