Taxpayers are entitled to two types of tax credits including refundable and non-refundable tax credits. The two credit types give you an opportunity to cut down on the amount of taxes you owe. Non-refundable credits are dependent on the amount of your tax obligation.
On the other hand, refundable tax credits provide a tax refund if you do not owe any tax. With a refundable tax credit, the IRS can get you back more money than what you had paid in payroll taxes. It shouldn’t be hard to find a good tax calculator online to help figure this out. Below is what you need to know as far as financing of refundable tax credits is concerned.
What You Should Know About Refundable Credits:
Financing of refundable tax credits is an important consideration as a taxpayer because you’re granted refundable tax credits even without income tax payable. Refundable tax credit not only decreases the federal tax you owe but could also give you the benefit of a refund. This type of credit gives your money back even if you end up with a negative tax liability.
Refundable Credits Lower Your Tax Liability
Refundable tax credits are able to lower your tax liability below zero, hence allowing you to get a refund. When you qualify for a refundable tax credit, and you’ve got a larger credit than the tax you owe, the difference is calculated, and you receive a refund for it.
In simple terms, the refundable credit amount is deducted from the tax you owe. For instance, let’s assume that you owe $1,000 in taxes and you qualify for a $1,200 refundable credit. Your refund, therefore, will be $200 ($1,200 minus $1,000).
You May Still Qualify Even with Zero Tax Liability
If you qualify for refundable credits, you may still use it even without a tax liability. You can apply for any refundable credits even with no taxes owed and qualify to receive credits as a refund. For instance, if you have no taxes due and are eligible for a refundable tax credit of $2,000, you’ll end up receiving the entire $2,000 as a refund.
Credits Change with Time
The available credits tend to change from one year to the next. The Congress can extend several tax credits each year or rewrite rules. The Congress often creates some credits as a stimulus plan intended to boost the economy. For that reason, credits are liable to expire after a set number of years.
Refundable Credits Have Varying Qualifications
The Congress creates tax credits in the tax code to give benefits to specific groups of citizens. All credits are tied to a particular set of qualifications to ensure it benefits the intended group of citizens. The taxpayer must meet those qualifications to get the credit.
The requirements are diverse and may include family size, level of income within a given range, or need that the applicant must have some earned income. Whereas there are credits designed exclusively for low-income earners, others come with higher income thresholds.
Rules Can Be Redrafted Any Time
The Congress reserves the rights to amend the tax code as well as credits at its discretion. The federal government sometimes revises the terms of the credit, consequently compromising the decision of whether to extend credit or allow it to expire. Among the rules that can be changed include the qualifications for the credit and the total number of applicants allowed to take advantage of the tax credit.
