Federal Tax Credits
There are two types of federal tax credits;
refundable federal tax credits and nonrefundable federal tax
credits.
What are nonrefundable federal tax
credits?
Nonrefundable federal tax credits can reduce
your income tax to zero. However if the amount of the tax
credit is greater than your tax due to the IRS, then you do not
receive a tax refund of the additional amount of the credit.
Nonrefundable tax credits reduce the tax entered on line 46
(Tax plus Alternative Minimum Tax) on the tax form 1040.
What are refundable federal tax
credits?
Refundable federal tax credits can reduce
your tax liability to zero and can also result in a tax refund
if the tax credit is greater than your tax liability. You do
not have to have any tax liability or have any tax withheld to
receive the tax refund. Refundable tax credits are treated as
payments and are subtracted from the total tax on line 63
(Total Tax) of the form 1040.
Facts about different types
of federal tax credits
-
A tax credit is subtracted dollar for dollar from
your tax.
-
A nonrefundable credit reduces or eiliiates your
income tax but will not give you an additional
refund.
-
A refundable credit reduces or eliminates your
total tax and also gives you a tax refund or any
amount of the credit that is ore than your tax
liability.
-
The child tax credit is a nonrefundable credit (the
additional child tax credit will be covered later).
The credit for child and dependent care expenses is
a nonrefundable credit. The earned income credit is
a refundable credit.
-
The rules for the qualifying child or person for
each credit generally concern the age of the
person, thier relationship to you and where they
live. However, the rules are different for each
credit.
-
The amount of the child tax credit is $1,000 per
qualifying child. To claim up to the full $1,000
for the child tax credit, your modified adjusted
gross income must be below certain amount for your
tax filing status.
-
The amount of the child and dependent care credit
is a percentage or your eligible expenses. You can
claim the child and dependent care credit only for
work related expenses.
-
You have to have earned income (usually wages or
salary) to claim the eanred income credit. The
amount o the earned income credit is found in the
Earned Income Credit Table.
-
You can elect to include or not include ontaxable
combat pay as earned income when determining the
earned income credit.
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