A tax credit is a dollar for dollar reduction in the amount of taxes owed by a taxpayer. It is a reduction in the amount of taxes owed, rather than a reduction in the amount of income that is taxable. Tax credits may be characterized as refundable or non-refundable. Refundable tax credits can reduce the tax owed below zero, and result in a net payment to the taxpayer beyond their own payments into the tax system. A non-refundable tax credit cannot reduce the tax owed below zero, and hence cannot cause a taxpayer to receive a refund in excess of their payments into the tax system.
An example of a tax credit is the Work Opportunity Tax Credit (WOTC), authorized by the Small Business Job Protection Act of 1996 (P.L. 104-188), a federal tax credit that encourages employers to hire nine targeted groups of job seekers by reducing employers’ federal income tax liability by as much as $2,400 per qualified new worker in 2004. The targeted job seekers group include veterans who are a member of a family that is receiving or recently received food stamps,disabled persons who completed or are completing rehabilitative services from a State or the U.S. Department of Veterans Affairs, and ex-felons who are a member of a low income family, among others.
