Refundable Tax Credits
As a US citizen and a taxpayer, you might be having different goals in mind when you are filing your income taxes each year. Some of you may want to lower the amount of taxes you owe, seek the largest possible refund or simply avoid paying more in taxes than you are legally required to pay. This is where tax credits can help you a great deal to meet all of those goals. The tax credits are mainly two major types that are refundable and nonrefundable. You have to keep in mind that when it comes to the chances of lowering the amount of taxes you owe, both types of credits are equally effective.
Refundable tax credits are termed as “refundable” because if you happen to qualify for a refundable credit, the amount of the credit is larger than the tax you owe. Then, you will be entitled to receive a refund for the difference. If you owe $1,000 in taxes and qualify for a $1,200 refundable credit, you would receive a $200 refund.
Income Tax Credit
Refundable tax credits, like payroll withholding, are regarded as tax payments. This essentially means that the refundable tax credit amount gets subtracted from the amount of owed taxes. Now in the case of some of the larger refundable credits such as the Earned Income Tax Credit, the refund amount can be a lot more substantial. This is one of the most valuable parts of your tax return.
In the case of non-refundable tax credits, some taxpayers may find that deductions or other circumstances have left them with absolutely zero taxes due. However, taxpayers can still consider applying for any refundable credits even with no taxes owed. If you have ended up with no taxes due and you have qualified for a $1,000 refundable tax credit, then you will stand to receive the entire $1,000 as a refund.
Deductions and Tax Payments
When you are doing your taxes, always make sure you calculate any refundable tax credits. After you have figured out all nonrefundable credits, deductions, and tax payments, keep in mind that each credit has completely different qualifications. However, all tax credits happen to come with a set of qualifications that every taxpayer needs to meet in order to receive the tax credit. Some of these common requirements are an income level which is within a certain range, family size, or requirement. Some credits are specifically for taxpayers who are of lower-income only, while others happen to have much higher income thresholds. You should also keep in mind that it is not completely guaranteed whether or not a tax credit is available every single year.
This brings us to the end of our discussion on what things we need to know when it comes to refundable tax credits. Now, let us know some on your thoughts on this topic.
