While both tax deductions and tax credits can save you money, a credit is more beneficial because it is a dollar-for-dollar reduction of the tax itself. A deduction lowers the income on which tax is figured. There are a variety of credits, including those that can help you pay for college and reward you for renewable energy investments. There are two types of credits: nonrefundable and refundable. Nonrefundable tax credits can reduce tax owed to zero but cannot generate refunds. A refundable credit, on the other hand, can reduce your tax below zero and provide you with a refund.

The federal American Opportunity Tax Credit expands and replaces the Hope credit and is available to eligible students based on the amount of qualified tuition and related expenses paid for the first four years of post-secondary education. It does not include room and board, student health fees or transportation and is available for tax years 2009 and 2010. The maximum American Opportunity tax credit for these years is $2,500 per student. The credit is phased out for modified adjusted gross income (AGI) from $80,000 to $90,000 ($160,000 to $180,000 if married filing jointly). It is nonrefundable for most taxpayers.

The federal Residential Energy-Efficient Home Improvement Credit is a nonrefundable tax credit that applies to individual taxpayers who install certain qualified energy-efficient improvements in their principal residence. The residence must be located in the United States and must be owned by the taxpayer. The credit is equal to the sum of 30 percent of the cost of all qualifying improvements and is subject to a $1,500 limit. Improvements include energy-efficient insulation, exterior windows, exterior doors, certain metal roofs, advanced main air circulating fans and any qualified natural gas, propane or oil hot water boilers.

There is also a federal Residential Renewable Energy Property Credit. Individuals can take a 30 percent nonrefundable credit for qualified energy-efficient property such as solar water heaters, geothermal heat pumps, photovoltaic, fuel cells or wind turbines.

Hawaii also has a similar nonrefundable credit for renewable energy technologies of this type. The requirements for claiming this credit are similar to those imposed for the federal credit. However, the Hawaii credit amount varies based on the energy system type and are subject to limitations.

For example, qualified residential single-family solar systems for water heating have a 35 percent credit with a $2,250 maximum, photovoltaic electricity generation systems have a 35 percent credit with a $5,000 maximum and wind renewable systems have a 20 percent credit with a $1,500 maximum. Limits are different for multifamily and commercial property. Hawaii offers a refundable solar credit but at a reduced credit percentage rate.

The Tax Credit for Buying a Home for first-time primary residence homebuyers was part of the 2009 stimulus bill. This refundable credit provides up to $8,000 for purchases from Jan. 1 to Nov. 6, 2009. The credit phases out for AGI from $75,000 to $95,000 for single and $150,000 to $170,000 for joint filers. This credit was extended for purchases between Nov. 7 and April 30. The extension increased the AGI phase-out from $125,000 to $145,000 for single and $225,000 to $245,000 for joint filers and expanded qualification to include up to a $6,500 credit for existing homeowners who purchase a residence. Qualified 2010 home purchases can be claimed on the 2009 return.

We have discussed a few of the tax credits that can save you money. Before taking a credit, be sure to do your research to ensure that you meet the qualification requirements to take the credit or consult with your tax preparer.