Photo credit: jb
We’re here in the midst of tax season, and some of you may be wondering about tax credits. Some tax credits are more valuable than others, something a lot of folks don’t realize. Most tax credits are not refundable, meaning that if the amount of the credit is more than your tax for the year, the credit is limited only to the amount of your tax.
For example, if you had tax payable of $1,500 and then had a Lifetime Learning Credit, Energy Efficient Home Improvement Credit, and/or Foreign Tax Credit amounting to more than $1,500. Your credits will be limited to $1,500 since that’s your tax payable and the credits are not refundable. Some credits are allowed to carry forward to future years, but that’s a topic for another post.
On the other hand, there are a few credits that are refundable, as listed below.
Five Tax Credits that Can Boost Your Refund
A tax credit is a dollar-for-dollar reduction of taxes owed. Some tax credits are refundable meaning if you are eligible and claim one, you can get the rest of it in the form of a tax refund even after your tax liability has been reduced to zero.
Here are five refundable tax credits you should consider to increase your refund on your federal income tax return:
1. The Earned Income Tax Credit is for people earning less than certain limits (which are adjusted year-to-year) from wages, self-employment or farming. Millions of workers who saw their earnings drop in the recently-completed tax year may qualify for the first time. Income, age and the number of qualifying children determine the amount of the credit, which can be substantial. Workers without children may qualify as well. For more information, see IRS Publication 596, Earned Income Credit. The Earned Income Credit is a refundable credit, meaning you can completely wipe out your income tax and generate a refund from this credit, under the right circumstances.
2. The Additional Child Tax Credit is for people who have a qualifying child. The maximum credit is $1,300 for each qualifying child. You can claim this in addition to the Child and Dependent Care Credit. The Child Tax Credit is non-refundable, so if your tax burden isn’t enough to take advantage of Child Tax Credit, if you qualify you can utilize the Additional Child Tax Credit to receive the remainder of the Child Tax Credit as a refund. See IRS Publication 972, Child Tax Credit for more details.
3. The American Opportunity Tax Credit, an education expense credit, can be up to $2,500 per eligible college student. Within income limits, 100% of the first $2,000 of qualified education expenses and 25% of the next $2,000 of qualified education expenses is available through AOTC as a tax credit. However, only 40% of this credit (up to $1,000) is refundable. At least you get some credit for the expense, even if your tax burden isn’t enough to fully take advantage of it.
4. The Premium Tax Credit, which is available to purchasers of health insurance on the Affordable Care Act exchange. If you haven’t taken advantage of the prepayment of this credit, when you file your return you may take a refund of this credit amount in full. This credit is based on your income level and the cost of your insurance policy from the exchange.
5. The Fuel Tax Credit If you purchase fuel used for off-highway business and farming purposes, you may be able to claim the Fuel Tax Credit (FTC). This is a refundable tax credit available for eligible types of use.
There are many other tax credits that may be available to you depending on your facts and circumstances. Since many qualifications and limitations apply to various tax credits, you should carefully check your tax form instructions, the listed publications and additional information available at www.irs.gov. IRS forms and publications are available on the IRS website at www.irs.gov and by calling 800-TAX-FORM (800-829-3676).
