Small Business Tax Dictionary
Tax Credit
A tax credit is a direct reduction in tax liability, allowing taxpayers to offset the amount of taxes they owe. Unlike a tax deduction (which reduces taxable income), a tax credit reduces the actual tax bill dollar-for-dollar.
Types of tax credits
Refundable tax credits — These can reduce your tax liability below zero, resulting in a refund of the excess credit amount. If you owe $500 in tax and have a $700 refundable credit, you receive a $200 refund.
Non-refundable tax credits — These can only reduce your tax liability to zero. Any unused portion of the credit is forfeited rather than refunded.
Partially refundable credits — A portion of the credit is refundable, and the rest is non-refundable.
Common examples of tax credits
- Education expenses — credits for tuition, training, and professional development
- Energy-efficient improvements — credits for solar panels, insulation, and other green upgrades
- Child care — credits for childcare costs incurred to enable work
- KiwiSaver member tax credit (New Zealand) — up to $521.43 per year from the government for KiwiSaver contributions
- R&D tax incentive (Australia) — credit for eligible research and development expenditure
Tax credits vs. tax deductions
| | Tax Deduction | Tax Credit | | ------- | ------------------- | ----------------------- | | Reduces | Taxable income | Tax owed | | Value | Depends on tax rate | Fixed dollar-for-dollar | | Impact | Indirect | Direct |
For example, a $1,000 tax deduction for someone in a 30% tax bracket saves $300 in tax. A $1,000 tax credit saves $1,000 in tax — making credits generally more valuable.
Why tax credits matter
Leveraging available credits can lead to significant tax savings. Tax credits incentivise specific behaviours and expenditures while supporting social and economic objectives — from retirement savings to environmental investment.