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What is a Refundable Tax Credit?

What is a Refundable Tax Credit?

You may be familiar with tax credits, but you may also be wondering: what are refundable credits and what are non-refundable credits?


What is a refundable tax credit versus a non-refundable tax credit?

A refundable tax credit can be paid to the taxpayer even if he owes no tax. Refundable tax credits can increase your refund amount if you have money left after taxes have been reduced to zero. Non-refundable tax credits, on the other hand, reduce the amount you owe the IRS to zero but don't put extra money in your pocket for any extra credit left over from what you owe. However, we are going to focus on refundable tax credits.


Here is a list of common refundable tax credits:


The Earned Income Tax Credit (EITC) 

The EITC (Earned Income Tax Credit) is for middle to low-income earners. It is generally based on income and eligible dependents. The EITC is still a refundable credit, which means that even if you don't owe any tax, you can still get the credit to increase your tax refund. The maximum tax credit for the fiscal year 2021, which applies to tax returns filed in 2022, is $6,728 for taxpayers with three or more eligible children. Even if you don't owe taxes, you could see your refund increase to $6,728 if you have three or more children and meet the other eligibility requirements. For the fiscal year 2021 alone (the taxes you file in 2022), the EITC has extended the U.S. rescue plan in several ways. If you don't have eligible children, the age requirements have been relaxed only for the fiscal year 2021. Usually, the minimum age has been reduced from 25 to 19. The maximum age for eligibility has increased from 65 to any age. The special lookback provision has also been extended for the fiscal year 2021. It allows you to use your 2019 income instead of your 2021 income, which may help you qualify for more EITC.


The Child Tax Credit (CTC) 

The Child Tax Credit (CTC) under the U.S. Rescue Plan Act of 2021 was improved to $3,600 for each qualifying child under the age of six and $3,000 for children ages 6 through 17 in 2021. Previously, this credit was limited to children under 16 and had a maximum credit amount of $2,000 per child, with a $1,400 refundable credit. One of the other changes to the CTC for the fiscal year 2021 is that this is the first time you can get a credit if you are 17 years old. The credit is also fully repayable for 2021 instead of being partially repayable.


Child and Dependent Care Credit

The child and dependent care credit are generally non-repayable. This means that applying for child care and dependent credit can reduce what you owe the IRS, but you can't get what's left of the credit as a refund after you reduce taxes to zero. But the childcare and dependent credit will be fully refundable under the 2021 U.S. rescue plan, only for the fiscal year 2021 (the taxes you'll pay in 2022). You can claim the child and dependent credit if you work or are actively looking for a job and pay for childcare for your dependents under 13 (no age limit if you are disabled). All eligible expenses include nursery, private kindergarten, after-school programs, daycare, and even summer and winter camps. The U.S. rescue plan has made major changes to the child and dependent care credit for the fiscal year 2021. The spending limit has increased from $3,000 for an eligible person to $8,000 and from $6000 for more than a qualifying individual to $16,000. The percentage used to calculate the credit has been changed from 35% to 50% of expenses. Hence, the maximum credit is $8,000 ($16,000 x 50%). Since the credit is fully repayable for the 2021 tax year, you can get up to $8,000 in credit if you have more than one qualified individual, even if you don't owe any taxes!


American Opportunity Tax Credit (AOTC)

American Opportunity Tax Credit (AOTC) is an education tax credit of up to $2,500 for college expenses. Part of this credit is repayable, and part is non-repayable. The first 40% is refundable and limited to $1,000. If the credit lowers what you owe to 0.40% of the remaining amount, up to $1,000 can be repaid. The remaining 60% is non-refundable. To be qualified, a student must be enrolled in a qualifying program at least half the time and apply for tertiary education only.


Premium Tax Credits 

Premium tax credits may, in certain circumstances, be refundable. For example, suppose a taxpayer had health insurance through the Health Insurance Marketplace and was eligible for IRS assistance for the cost of monthly insurance premiums but did not. In that case, they might be eligible for a refundable tax credit. Suppose the government has paid no qualifying assistance to the insurance company during the year. In that case, the taxpayer may receive a tax credit for the premium in a forgivable loan that will reduce the amount owing to the IRS or increase the refund amount.

Some people may not file a tax return if they earn below the tax filing threshold. Still, we recommend filing a tax return if you have taxes deducted from your paycheck and qualify for one of these refundable credits listed. Each year, the IRS has over $1 billion in unclaimed refunds, and many of the unclaimed refunds belong to non-filers and may be eligible for unclaimed refunds.

Don't worry about knowing these tax rules. A tax specialist asks simple questions and suggests the deductions and tax credits you are entitled to based on your answers.


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