Federal Tax Credits
There are two types of federal tax credits;
non refundable tax credit and refundable tax
credits. In claiming tax credits, you should know the
differences and understand how each federal tax credit
What is the difference between a tax
deduction and a tax credit?
A tax deduction reduces taxable income
whereas a federal tax credit is a dollar-for-dollar reduction
of the tax amount owed to the IRS. Federal tax credit is the
reason why someone who never had any taxes withheld or paid
taxes may get federal tax refunds from the IRS.
Understanding federal tax credits
What are nonrefundable tax
Nonrefundable tax credits are amounts that
are subtracted directly from the taxes owed. Therefore, a
nonrefundable tax credit can never be more than the tax itself.
In another word, you cannot receive a federal tax refund for
the excess of nonrefundable tax credit and the actual tax owed
to the IRS.
Examples of nonrefundable tax
child and independent care tax credit
child tax credit
Hope and Lifetime learning tax credits
retirement savings contributions tax credit
energy tax credits
What are refundable tax credits?
Refundable tax credits are amounts added to
the federal income tax withheld (if there is any) on your
income tax return so that if the total amount is more than the
tax owed to the IRS, the excess will be refunded. While
nonrefundable tax credits cannot be more than the tax owed,
refundable tax credits can.
Examples of refundable tax
- earning income credit
- additional child tax credit