Before the actual amount of tax to be paid is determined, various direct offsets to tax liability are taken. Such “direct offsets” are called “tax credits.” The credits are dollar-for dollar-reductions of the tax liability. Credits are usually calculated based on certain types of expenses incurred. The most popular are foreign tax credits (offsetting taxes paid to a foreign government on income reportable in the U.S.), education credits, business credits (most common is research and development credit), and child tax credits.
Earned Income Tax Credit (EITC)
This is a refundable credit available to certain low-income individuals. You must have earned income as an employee, independent contractor, farmer, or business owner to qualify. The amount of credit varies depending on the number of your qualifying children and adjusted gross income level.