George W. Bush and Al Gore are offering both tax credits and tax deductions. What's the difference, and how do they work?
Tax credits directly lower your tax bill. Broadly speaking, if you have $10,000 in taxable income, you're in the 15 percent federal tax bracket and owe $1,500 in taxes. For every child you have, you're entitled to a $500 tax credit. Let's say you have one kid: That $1,500 tax bill would be lowered to $1,000. Tax credits come in two varieties, refundable and nonrefundable. A refundable tax credit allows you take the entire amount of the credit even if it pushes your taxes to less than zero. For example, if you owe $1,000 in taxes but are eligible for a $2,000 tax credit, you can take the whole amount, and the Internal Revenue Service will send you a check for $1,000. The best-known refundable credit is the Earned Income Tax Credit, which is designed to eliminate taxes for the working poor. A nonrefundable tax credit, such as the $500 for each child, allows you only to reduce your taxes to zero.