A tax credit is a tax incentive which allows certain taxpayers to subtract the amount of the credit from the total they owe the state. Tax credits can be granted in recognition of taxes already paid or to encourage behaviors like investment or parenting. A credit directly reduces tax bills, unlike tax deductions and tax exemptions, which indirectly reduce tax bills by reducing the size of the base (for example, a taxpayer’s income or property value) from which the tax bill is calculated. Most tax credits are nonrefundable tax credits, meaning that they can only be used to the point at which no more taxes are owed. However, some tax credits are refundable tax credits, meaning if the credit exceeds the amount of taxes owed, the excess is given to the taxpayer.

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