- Tax credit
The term tax credit describes two different concepts:
*The first is a recognition of partial payment already made towards
*The second is a state benefit paid to employees through the tax system, which has the effect of increasing (rather than reducing)
Tax credits in recognition of tax already deducted
Within the Australian, Canadian, United Kingdom, and United States
taxsystems, a tax credit is a recognition of partial payment already made towards taxes due. A similar concept exists () in the French tax system. This situation arises, for example, when standard rate tax has been deducted at source (" withholding tax"), but the tax-payer is subject to further taxation at a higher rate. It also applies in dividend imputationsystems.
In some countries (e.g. the United Kingdom), "tax credit" refers to tax treated as deducted at source, which has not actually been deducted or paid.
Tax credits as a form of state benefit
Tax credits may be characterized as either refundable or non-refundable, or equivalently non-wastable or wastable. Refundable or non-wastable tax credits can reduce the tax below zero, and result in a net payment to the taxpayer beyond their own payments into the tax system, appearing to be a moderate form of
negative income tax. Examples of refundable tax credits include the earned income tax creditand the additional child tax creditin the U.S., and working tax credits or child tax credits in the UK.
A non-refundable or wastable 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. Some examples of non-refundable tax credits are the
Hope and Lifetime Learningeducational tax credits in the U.S. or the former children's tax creditin the UK. Another example would be declared gifts made to registered charities in the UK under the current Giftaidscheme, which attract tax relief (claimed by the charity) at the standard rate but which cannot reduce the donor's liability beyond the amount of tax actually paid by them in a given year. All tax credits in Ireland are non-refundable.
Tax credits and minimum wage
Tax credits are like a means tested benefit paid direct to employees to encourage them into work. In the United Kingdom, ‘
child tax credit’ and ‘ working tax credit’ are paid directly into the claimant's bank account post office account or by GIRO. A minimum level of child tax credits is paid to all individuals or couples with children. The amount paid is increased if either parent works for at least 16 hours a week. Working tax creditis paid to single low earners without children who are aged over 25 or over and are working over 30 hours per week and also to couples without children, at least one of whom is over 25, provided they are working for 30 hours a week combined and at least one of them is working for 16 hours a week. They are means-tested and the rules for calculating both child tax credit and working tax credit are very complex.
Some argue that tax credits contribute to the poverty traps as they are tapered as earnings rise. That means the disincentive to work when expected wages are little more than unemployment benefits, and the difficulty for workers to break above a net earning margin faced with not just income tax, but national insurance, VAT, student loan repayments and other cumulative tax burdens, and loss of other benefits such as housing and council tax benefits, free school meals, and free prescriptions.
This indirect wage regulation forms an important part of income for low earners and their families. It reduces the stigma of collecting benefits for workers. Some commentators have suggested that raising the personal allowance could achieve a similar effect for single workers with reduced administrative burden for both employers and
Tax credits and tax deductions
A tax credit is generally more valuable than a
tax deductionor tax allowanceof the same magnitude because a tax credit reduces tax directly, while a deduction or allowance only reduces taxable income and so the reduction in tax is only a fraction (the marginal tax rate) of the deduction or allowance.
Corporate tax payers may lower the total amount of tax they owe to the federal government, via programs such as the
New Markets Tax Credit Program.
* Working Tax Credits (UK)
National Minimum Wage Act 1998
*HSW|understanding-2006-hybrid-car-tax-credits|Understanding 2006 Hybrid Car Tax Credits
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Look at other dictionaries:
tax credit — n: an amount that may be subtracted from the sum of tax otherwise due and that is distinguished from a deduction applied to gross income in the calculation of taxable income compare exemption Merriam Webster’s Dictionary of Law. Merriam Webster.… … Law dictionary
Tax-Credit — [tæks kredɪt, englisch], ein Abzug von der Steuerschuld, durch den entweder individuellen Verhältnissen Rechnung getragen beziehungsweise spezielle Steuervergünstigungen gewährt werden sollen oder andere Steuern zur Vermeidung einer… … Universal-Lexikon
tax credit — tax credits N COUNT A tax credit is an amount of money on which you do not have to pay tax. The president proposed to provide tax credits to businesses that allow workers time off … English dictionary
tax credit — A direct dollar for dollar reduction in tax allowed for expenses such as child care and R&D for building low income housing. Compare tax deduction. Bloomberg Financial Dictionary Additional amount on dividends paid by a company resident in France … Financial and business terms
tax credit — 1) The tax allowance associated with the dividend paid by a company. The shareholder is given allowance for the tax paid at source by the tax credit, at the same rate, 10/90; i.e. a dividend of £90 received by the shareholder had an associated… … Accounting dictionary
tax credit — 1) The tax allowance associated with the dividend paid by a company. The shareholder is given allowance for the tax paid at source by the tax credit, at the same rate, 10 90; i. e. a dividend of £90 received by the shareholder has an associated… … Big dictionary of business and management
tax credit — An amount subtracted from an individual s or entity s tax liability to arrive at the total tax liability. A tax credit reduces the taxpayer s liability dollar for dollar, compared to a deduction which reduces taxable income upon which the tax… … Black's law dictionary
Tax Credit — An amount of money that a taxpayer is able to subtract from the amount of tax that they owe to the government. The value of a tax credit depends on what the credit is being provided for, and certain types of tax credits are granted to individuals … Investment dictionary
tax credit — /ˈtæks krɛdət/ (say taks kreduht) noun a credit received by a taxpayer in relation to certain items of expenditure or income, and deducted directly from income tax otherwise payable … Australian English dictionary
tax credit — A credit against income tax itself, as distinguished from a deduction which applies only to reduce the income. The sum owing a taxpayer for overpayment. Internal Revenue Code § 6402(a) … Ballentine's law dictionary