How do Tax Credits Work?

[skives]

If I work all year and pay $6,000 in federal taxes through work and come tax time the IRS says I was suppose to pay $6,000 so I get no refund and owe nothing but I had a tax credit for $1,200 does that reduce my tax liability to $4,800 and I would receive a $1,200 refund?

[kork13]

If I work all year and pay $6,000 in federal taxes through work and come tax time the IRS says I was suppose to pay $6,000 so I get no refund and owe nothing but I had a tax credit for $1,200 does that reduce my tax liability to $4,800 and I would receive a $1,200 refund?

Tax credits are "below the line" reductions in your tax bill, while tax deductions are "above the line" reductions. So tax deductions count against your earned income (reducing your tax liability by a factor of your marginal tax bracket). Meanwhile, tax credits count directly against your tax liability (reducing your taxes dollar-for-dollar).

If your tax liability is $6000 and have a $1200 tax credit, your total tax bill would be $4800. Note that this amount has nothing to do with how much you paid in tax withholding. Tax withholding is basically just pre-paying against what your annual tax bill will ultimately come out to. So in this scenario, if you owe $4800, and paid $6000 in tax withholdings, you'd get $1200 back as a tax refund. If your tax withholdings were lower, say $4000 for the year, then you'd owe an additional $800 when you file your tax return.

[disneysteve]

Yes. A tax credit comes straight off the top.

[Like2Plan]

If I work all year and pay $6,000 in federal taxes through work and come tax time the IRS says I was suppose to pay $6,000 so I get no refund and owe nothing but I had a tax credit for $1,200 does that reduce my tax liability to $4,800 and I would receive a $1,200 refund?

Yes.

As Kork explained it only matters what your tax liability is. (And, something you didn't ask about) There are 2 types of tax credits. Refundable and nonrefundable.

Refundable tax credits would give you a refund if your tax liability was $0 and you paid $0 in withholding. Nonrefundable tax credits only offset what your tax liability would otherwise be. So, if you had $0 tax liability and you paid $0 in withholding, you would not receive the nonrefundable tax credit.


Here is a link to 5 Things You Should Know about Refundable Tax Credits (from Turbotax):

https://turbotax.intuit.com/tax-tips...dits/L9gpESSU2


Investopedia: What Is a Non-Refundable Tax Credit?
https://www.investopedia.com/terms/n...etaxcredit.asp