First, there’s little difference between a tax credit and a tax deduction, except that a credit is worth much more than a deduction. While a tax deduction reduces the amount of income on which a family must pay taxes, a tax credit directly reduces–dollar for dollar–the amount of tax the family must pay.
Second, education tax credits are designed mainly to reduce the effective cost to parents of choosing a non-public school for their child. Since the funds accruing to the taxpayer from tax credits never get into government coffers, the taxpayer benefitting from a tax credit is not considered to be receiving public funds.
Third, some education tax credits are designed to benefit parents who pay taxes while–strange as it may sound–other education tax credits are designed to benefit parents who do not pay taxes.
Credits to Benefit Parents Who Pay Taxes
Education Savings Accounts. Taxpaying parents receive a direct tax credit by not having to pay taxes on the interest earned on these accounts. At present, such accounts exist only at the federal level for post-secondary education.
Education Tax Credits. Taxpaying parents receive a direct tax credit for all or part of the expenses they have incurred in educating their child. Illinois, Iowa, and Minnesota have this type of credit.
Credits to Benefit Parents Who Don’t Pay Taxes
Refundable Tax Credits. Non-taxpaying parents receive a direct refund from the state for all or part of the expenses they have incurred in educating their child. Unlike other credits, this “credit” does involve the spending of public funds. Minnesota has this type of credit.
Scholarship Tax Credits. Taxpayers receive a credit for donating to organizations that indirectly benefit non-taxpaying parents by providing them with scholarships to send their children to non-public schools. Arizona has this type of credit.
Universal Tax Credits. These combine the Education Tax Credit, for parents who pay taxes, with the Scholarship Tax Credit, for parents who do not pay taxes. To date, no Universal Tax Credit program has been enacted.