FAQS – Tax Credit Information

A tax credit is an amount of money a person (or business) may subtract directly from the taxes that they owe.

A tax deduction in an amount of money a person (or business) may subtract from their gross income to reduce their net (or taxable) income.

The value of a tax deduction is equal to the tax rate applied.
For example: a $100 deduction in 2024 would reduce an individual’s tax liability by up to $4.80 (at a tax rate of 4.8%) or a corporate tax liability by $4.00 (at a tax rate of 4.0%).

The value of a tax credit is the exact amount received, and not dependent on the tax rate.
A $100 tax credit will reduce taxes owed by $100.

Workers typically have income withheld from their paycheck on a set schedule. This “withheld” income is then submitted to DOR as a prepayment for the annual income tax due related to a job.
Some credits allow businesses to keep (i.e. retain) the withholdings, rather than turn the money over to DOR.
Workers are still given credit for the withholdings kept by businesses. They do not owe more in taxes at the end of the year.
For example:

Company A turns the withholding in to DOR.
State revenues increase by $50.
Employee C has paid $50 of their income tax liability before they file their annual return.

Company B is allowed to keep (i.e. retain) the $50.
State revenues do not increase.
Employee D has paid $50 of their income tax liability before they file their annual return.

Agriculture – Designed to increase crop farming or cattle investment.
Business Recruitment – Designed to encourage businesses to locate or expand within the state.
Community Development – Designed to enhance community infrastructure or services.
Domestic and Social – Designed to encourage donations to not-for-profit service agencies.
Entrepreneurial – Designed to increase investment in new businesses.
Environmental – Designed to promote specific environmentally friendly businesses and activities.
Financial and Insurance – Designed to offset banking and insurance related costs.
Housing – Designed to increase investment in new and rehabilitated housing.
Redevelopment – Designed to increase investment in distressed areas.
Training and Educational – Designed to promote skills training by employers.

Authorized – a taxpayer has applied for a tax credit but has not yet performed the required action(s) to receive the credit.
Issued – a taxpayer has applied for a tax credit and has performed any required action(s).
Redeemed – a taxpayer has used the credit to lower their tax bill.

Refundable – any amount of a tax credit above what the taxpayer owes is paid back to the taxpayers.

Example: A taxpayer owes $50 in taxes and has a $100 refundable tax credit. The taxpayer no longer owes tax and will receive a refund check of $50.

Non-refundable – any amount of a tax credit above what the taxpayer owes is “lost”.

Example: A taxpayer owes $50 in taxes and has a $100 nonrefundable tax credit. The taxpayer no longer owes tax but will not receive a refund check.

Carry forward – any amount of a tax credit not used the first year may be used in future years.

Typically, a credit may be “carried forward” for up to 10 years. The most common lengths are 4, 5 and 10 years.
In some instances, tax credits may be carried forward forever until used.
Example:

Tax Year	Tax Credit	Tax Owed	Remaining Tax Credit
2024	$100	$50	$50
2025	$50	$20	$30
2026	$30	$30	$0

Carry backward – any amount of tax credit not used the first year may be applied to previous years taxes. This requires amending old tax returns.

Typically, a credit may be “carried back” for up to 3 years.
Example: A taxpayer owes $50 in taxes and has a $100 nonrefundable tax credit. The taxpayer may go back to a previous year and apply the remaining $50 credit. This requires the taxpayer to amend a tax return for a previous year.
Example:

Tax Year	Tax Credit	Tax Owed	Remaining Tax Credit	Return Status
2022	$30	$30	$0	Amended
2023	$50	$20	$30	Amended
2024	$100	$50	$50	Current

A refundable tax credit cannot be carried forward or backward as the benefit of the credit is realized immediately, regardless of how much a taxpayer owes in taxes.