According to the Internal Revenue Service (IRS), credits, exemptions and payments comprise the types of claims which can be included on income tax returns. Each type of claim lowers the dollar amount the taxpayer is responsible for paying to the IRS.
A tax credit is a direct reduction in the final tax bill you owe to the IRS. An example of tax credits include the Child Tax Credit, which is an amount, per child, that you are allowed to subtract from your total tax bill and not just from the income you use to calculate your taxes.
An exemption amount ($3,800 per exemption for tax year 2012 and $3,900 for 2013) is the amount you are allowed to deduct for each person listed on your return. Exemptions can include a spouse, dependents, or parents.
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Some taxpayers pay the government through withholding from the government while others, such as business owners, pay via estimated tax payments, which are made four times per year. Regardless of how the payments are made, taxpayers are still entitled to claim the federal tax payments they have already made during the year on their tax returns.
Many of the credits available through the Internal Revenue Service require additional schedules and attachments. For example, in order to claim business income and losses, Schedule C must be attached to Form 1040.
The IRS reserves the right to request verification for any credits or exemptions listed on the tax return.