I love tax credits because they help to reduce the taxes my Client has to pay Uncle Sam. The two main types of credits that can reduce your tax bill is the refundable tax credit and the non-refundable tax credit. Before delving into this topic, let me describe these two credits.
A refundable tax credit is a credit that can reduce your tax liability below zero, in turn creating a refund for you. Hence, the term, refundable credit (a refund of the credit). If the refundable credit amount is larger than the tax liability, you will receive the difference between the refundable credit amount and the tax liability amount in the form of a refund.
Some refundable tax credits are as follows;
- Earned Income Credit;
- Net Premium Tax Credit (Form 8962);
- Additional Child Tax Credit;
- Small Business Healthcare Tax Credit
Refundable credits are treated like payments made to the IRS and these credits are listed in the Payments Section of the Form 1040, which start on Line 64.
Now that you know what a refundable credit is, let’s define and talk about the non-refundable credit. A non-refundable credit is a credit that is subtracted for your tax liability up to the total amount that you owe. Unlike refundable credits, a non-refundable credit does not reduce your tax liability below zero, which means that any portion of the nonrefundable credit that is unused will not be refunded to you, will expire in the year claimed, and cannot be carried over.
Some non-refundable tax credits are as follows;
- Child & Dependent Tax Credit;
- Savers Tax Credit;
- Adoption Tax Credit;
- Foreign Tax Credit
Non-refundable tax credits are listed in the Taxes and Credits section of the Form 1040, which starts on Line 38.
So, what if a credit fits into both categories (refundable and non-refundable), then what? When this is the case, the credit would be considered a partially refundable credit. A partially refundable credit is not as cut and dry as a refundable or non-refundable tax credit. As confusing as it may sound, the partially refundable credit can be subtracted from the amount of taxes owed and (to an extent), applied to increase that tax refund. The concept is a bit confusing to say the least. An example of a partially refundable tax credit is the American Opportunity Tax Credit (AOTC).
Not sure if you qualify for a tax credit? Please don’t hesitate to reach out to my office. The rules surrounding tax credit change and while you may not have qualified for a tax credit in one year, you may in the following year.