What Is A Refundable Tax Credit?

One of the most confusing terms to those new to the tax game is refundable tax credits. 

Most people have heard of refundable tax credits but are unsure how they work or how they can be of benefit.

We’re here to help explain and clear it up for you! 

This article will give you the simplest definition of refundable tax credits and list the most common credits, and the criteria for receiving them.. 

Refundable tax credit definition

Firstly, let’s quickly go over what a tax credit is. 

A tax credit directly reduces the amount of tax owed by a taxpayer. It’s an amount of money that is subtracted from the taxes they owe. There are two main categories of tax credits: refundable and nonrefundable. A refundable tax credit allows you to receive a payment from the IRS if your credits exceed your tax liability. On the other hand, a nonrefundable tax credit doesn’t generate a refund and can only reduce your taxes owed to $0. 

To better visualize how a refundable tax credit works, take a look at the following example. Let’s say you owe $2000 in taxes this year but you’re also eligible for $3000 refundable tax credits. That means your $2000 tax liability will be eliminated, but you will also get a $1000 refund from the IRS. Yes, you can even ‘earn’ some money with refundable tax credits!

What tax credits are refundable? 

Now that you understand how beneficial a refundable tax credit can be, let’s check out the most common refundable tax credits that you might be eligible for:

1. Child Tax Credit (CTC)

The CTC is a federal program that helps American families make ends meet, easing the costs of raising children, and to help prepare for their children’s future. Under the American Rescue Act of 2021, families could receive $3,000 per qualifying child under the age of 6 and $3,600 for those aged 6 to 17.

2. Earned Income Tax Credit (EITC) 

EITC is a refundable tax credit for low- to moderate-income working taxpayers and couples, particularly those with children. The EITC benefit amount is determined by the recipient’s income and the number of children. For example, if you have three or more qualifying children and meet all other conditions, you can get a refund of up to $6,728. 

3 . American Opportunity Tax Credit (AOTC) 

AOTC helps students or their parents (if the student is dependent) pay for the first four years of education after high school with a credit of up to $2,500. One thing to note about this tax credit is that it’s only partially refundable—40% is refundable and is capped at $1,000, while the remaining 60% is nonrefundable.  

4. Premium Tax Credits (PTC) 

PTC is a refundable tax credit that helps low- and moderate-income people and families afford health insurance through the Health Insurance Marketplace. A sliding scale is used to determine the amount of your premium tax credit: those with a lesser income are given greater credit to assist in offsetting the cost of their insurance.

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Do I Need To File A Tax Return?

For many first-time filers and low-income filers, it can be confusing to determine whether or not you need to file a tax return at all. How much do you need to make in order to be required to pay taxes? Is it possible to get a tax refund for taxes you’ve already paid from withheld payments? To help answer questions you may have about filing this year, the IRS has put together 6 reasons why you might want to file if you are not sure of your situation.

Should you file taxes this year?
Should you file taxes this year?

1. Federal Income Tax Withheld. If you are not required to file, you should file to get money back if Federal Income Tax was withheld from your pay, if you made estimated tax payments, or had a prior year overpayment applied to this year’s tax.

2. Recovery Rebate Credit. If you did not qualify or did not receive the maximum amount for the 2008 Economic Stimulus Payment, you may be entitled to a Recovery Rebate Credit when you file your 2008 tax return.

3. Earned Income Tax Credit. You may qualify for the Earned Income Tax Credit, or EITC, if you worked, but did not earn a lot of money.  EITC is a refundable tax credit meaning you could qualify for a tax refund.

4. Additional Child Tax Credit. This credit may be available to you if you have at least one qualifying child and you did not get the full amount of the Child Tax Credit.

5. First time Homebuyer Credit. If you bought a main home after April 8, 2008, and before July 1, 2009 and did not own a main home during the prior 3 years, you may be able to take this refundable credit.

6. Health Coverage Tax Credit. Certain individuals, who are receiving certain Trade Adjustment Assistance, Alternative Trade Adjustment Assistance, or pension benefit payments from the Pension Benefit Guaranty Corporation, may be eligible for a Health Coverage Tax Credit when you file your 2008 tax return.

For more information about filing requirements and your eligibility to receive tax credits, visit the IRS Web site at IRS.gov.

Tax Benefits for Disabled Taxpayers

There are several tax credits and benefits available to qualifying taxpayers with disabilities as well as to the parents of disabled children. Listed below are several tax credits and other benefits available if you or someone else listed on your federal tax return is disabled. Continue reading “Tax Benefits for Disabled Taxpayers”