The Use of Tax Credits to Reduce Tax Liabilities Has Exploded in Recent Years

Over the past 25 years, lawmakers have increasingly turned to using targeted tax credits to benefit key constituents—such as families with children—or to incentivize certain economic behavior—such as replacing the windows in your home. Tax credits differ from deductions in that they directly lower your tax liability rather than reduce your taxable income. Some tax credits, such as the Earned Income Tax Credit, the Child Credit, and some educational credits are refundable, meaning you can get a check from the IRS even if you owe no income taxes. Millions of taxpayers receive such refundable checks. The combined cost of these tax credits peaked in 2010 at $233 billion (in today’s dollars) and has since dropped to $176 billion. If tax credits were classified as a spending program, they would be one of the largest domestic programs in the budget.

For more charts like the one below, see the second edition of our chart book, Putting a Face on America's Tax Returns.