Tax credit is an important term in the field of taxation. The expression tax credit encompasses two distinct ideas. The first one refers to the acknowledgement of a part payment of tax that has been done in advance for taxes outstanding. The second one refers to a state benefit given to the workers by the tax authorities. With this benefit, the net income of the workers can be increased (instead of being decreased). Concept of Tax Credit Under the tax system of Canada, Australia, the United States and United Kingdom, a tax credit is an acknowledgement of a part payment of tax that has been done in advance for taxes outstanding. In France, a same type of approach prevails, however, the names are distinct in that country. This condition happens, for instance, where standard rate of tax has been subtracted at source (this is also termed as withholding tax), however, the taxpayer is additionally taxable at an increased rate. Tax credits in the form of state benefits Tax credits can be categorized into the following types:
Refundable tax credit or non-wastable tax credit: With the help of non-wastable or refundable tax credit, tax outstanding can be lowered under nil and this leads to a net payment to the person who is paying taxes over his payment to the tax authority. This seems to be a mitigated type of negative income tax. Refundable tax credit examples are the extra child tax credit and earned income tax credit in the United States and child tax credits and working tax credits in the United Kingdom.
Non-refundable tax credit or wastable tax credit: With the help of wastable or non-refundable tax credit, tax outstanding cannot be lowered under nil. Therefore, it does not result the taxpayer in getting a refund amounting more than his payments to the tax authorities. Examples of non-refundable tax credits are the erstwhile children’s tax credit in the United Kingdom and the Hope and Lifetime Learning educational tax credits in the United States. Every tax credit in Ireland is non-refundable in nature. Tax deductions and tax credits A tax credit is a more useful option in comparison to an equal amount of tax allowance or tax deduction. This is simply due to the reason that with the help of tax credit, tax can be minimized in a direct manner and at the same time, a tax allowance or tax deduction only diminishes the taxable earnings. As a result, the decrease in tax is only a portion (marginal rate of tax) of tax allowance or tax deduction.
Last Updated on : 9th July 2013