(NewsNation) — Federal tax credits could be key in lowering tax bills for many Americans this April.  

However, a tax credit is different from a tax deduction, which lowers the amount of an individual’s taxable income.

Tax credits are often more valuable compared to deductions because they directly reduce your tax bill dollar-for-dollar.

Here’s what to know. 

What is a tax credit? 

A tax credit is a dollar-for-dollar amount an individual can directly subtract from their tax return to reduce the tax they owe. 

This credit lowers the total tax payment or increases the refund. 

Tax credits are more favorable than tax deductions because they reduce the tax due, not just the amount of taxable income, according to Investopedia. 

Tax credits are available for a variety of things including buying an electric vehicle, making clean energy home investments, buying your first home, or buying health insurance through the marketplace.

What types of tax credits are there? 

Tax credits come as nonrefundable, refundable, and partially refundable.

How do refundable tax credits work?

Refundable credits are paid out in full and a taxpayer also gets a refund for any remaining credit that’s still available.

Some taxpayers who aren’t required to file may still want to do so to claim refundable tax credits. 

There are several kinds of refundable tax credits such as the premium tax credit which helps individuals and families cover the cost of premiums for health insurance purchased through the health insurance marketplace. 

The Earned Income Tax Credit is for low- to moderate-income taxpayers who earn income through an employer or by being self-employed and meeting certain criteria based on income and number of family members. 

The Internal Revenue estimates four out of five workers claim the Earned Income Tax Credit, which means millions of taxpayers are putting EITC dollars to work for them, the agency said. 

But there are still millions of workers who qualify but don’t claim this credit including grandparents raising their grandchildren, veterans, those recently divorced, unemployed or experienced other changes to their marital, financial or parental status, and those living in rural areas. 

How do non-refundable tax credits work? 

For non-refundable tax credits, once a taxpayer’s amount owed gets to zero, they won’t get any leftover amount back as a refund.

Nonrefundable tax credits are valid in the year of reporting only, expire after the return is filed, and may not be carried over to future years, Investopedia reported. 

Non-refundable tax credits that apply this year include the adoption credit, mortgage interest credit and the work opportunity credit.

Nonrefundable tax credits can negatively impact low-income taxpayers because they cannot use the entire amount of the credit.

How do partially refundable credits work?

Some types of credits are partially refundable.

These include the American Opportunity Tax Credit for postsecondary education students.

Under this credit, if a taxpayer reduces their tax liability to 0 before using the entire portion of the $2,500 tax deduction that’s available, the remainder may be taken as a refundable credit up to the lesser of 40% of the remaining credit or $1,000, according to Investopedia.