Posted by James Financial Services Inc

Vital Things to Know about the Refundable Tax Credit

Vital Things to Know about the Refundable Tax Credit

There are different goals for all taxpayers when filing their returns each year. Some might aim at reducing their tax amount. At the same time, another might desire a huge refund amount, or avoid paying a penny above what they are required to pay by law. The only tool to make this possible is a tax credit. 

Taxpayers have two types of tax credits: refundable type and nonrefundable one.

  • With both credit types, one can lower the overall tax amount owed.

  • With a refundable tax credit, you might qualify for a tax refund when you don’t owe any tax. 

  1. Getting a Refund with Refundable Credits 

Some tax credits are called refundable since it qualifies the taxpayer for a credit (refunds), and the credit amount is more than the tax owed. For the difference, the taxpayer gets a refund.

  • For a taxpayer that owes $450 as tax and got a refundable credit of $600. Such would get a refund of $150

  • A refundable tax credit is also classified as tax payment the same way with payroll withholding. As a result, the refundable tax credit amount will be subtracted from the tax owed. 

  • One can have a considerable refund for some substantial refundable credit, such as the EITC (Earned Income Tax Credit). As a result, refundable credit is one of the essential parts of anyone's tax return. 

2. One Might Qualify with No Tax Liability

For some taxpayers, deductions, credits that are nonrefundable, and other tools might leave them with no tax liability at all. Even if one owes zero tax, it does not disqualify the application for refundable credits that one qualifies for. You will get it as a refund in such a case. 

For example, someone without a tax who got a refundable credit of $500 will receive the whole $500 as a tax refund. As a result, it is essential to estimate your refundable tax credit after you know all the nonrefundable credits, tax payments, and deductions.

  1. There are Qualifications for Each Credit 

There are criteria one needs to meet to qualify for each tax credit for someone to receive them. A few of the requirements are:

  • An income within a given range

  • The size of the family

  • The taxpayer must have some income as earnings.

There are some credits designated for people in lower-income brackets, although there are others with a higher income level. There are step scales with many of these credits that allow taxpayers in lower-income to qualify for a more major tax credit than those with more significant income. 

  1. Credit Available Differ Every Year 

There is no guarantee on the availability of tax credits every year. Every year, Congress can extend or halt any of the available tax credits from past years. 

 There are tax credits formed as part, in conjunction with a stimulus program to restore the economy and, therefore, have an expiry date. Any credit not extended by Congress will expire.

A perfect example is the "Making Work Pay Credit" that gave qualified taxpayers $400 and $800 to married couples with joint filing. This credit was available in 2009 and 2010, but Congress did not approve its continuation, which led to its disappearance. 

  1. The Rules can Change. 

In deciding whether to retire a tax credit or allow it to continue, Congress might compromise at times by changing the rules. This might make the credit worth more or less compared to what it was in the previous years. 

An example was the 2008 First-Time Homebuyer Credit, with a worth of $7,500. Taxpayers had to repay some parts every year. Rather than expiring the credit at the end of 2008

  • There were an extension and alteration for homes bought in 2009 and 2010

  • The credit altered had a value of up to $8000 and might not be repaid except the taxpayer sold or left the house. 

The terms can change, for instance:

  • The credit might change and become nonrefundable 

  • There might be a change in the qualification of the credit, which affects the number of people that might qualify for it.



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