What is a refundable tax credit?
Although you might be familiar with tax credits, there are still some things that may be new to you.
- What is refundable credit?
- What is nonrefundable credit?
These terms are often used in connection with the recovery credit or the changes to credits for dependents.
What is the difference between a refundable and nonrefundable tax credit?
A refundable tax credit may be available even if the taxpayer doesn’t owe any taxes. Refundable tax credits can increase your refund amount if you have any extra money after paying your taxes. A nonrefundable tax credit, on the contrary, will reduce your IRS owes to zero, but it won’t add any money to your pockets for any additional credit.
Here is a list of common refundable tax credits
1. Earned Income Credit (EITC) is designed for people with moderate to low incomes. It is generally based on income and dependents. Even if you do not owe taxes, the EITC is a refundable credit that can be used to boost your tax refund. Tax credits for the 2021 tax year are $6,728. This applies to 2022 tax returns. Even if you don’t owe taxes, you may be eligible for a tax credit of up to $6728 if your children are three or more and you meet other eligibility requirements.
2. The Child Tax Credit (CTC), under the American Rescue Plan Act 2021, was raised to $3,600 per child under six years old and to $3,000 for children aged 6-17 years for the tax year 2021. This credit was previously limited to children under 16 years old. It had a maximum credit limit of $2,000 per child, with $1,400 being refundable. The Child tax credit has been updated for the tax year 2021. This is the first time you might be eligible to receive the credit if your child is 17 years old. For the tax year 2021, the credit is fully refundable.
3. The Dependent Care Credit and Child Credit are not usually refundable. The Dependent Care Credit and Child Care Credit can help reduce your tax liability to the IRS, but you cannot get the credit’s remaining amount in a refund after it has reduced your taxes to zero. The American Rescue Plan of 2021 will make the Child and Dependent Care Credit fully refundable for the tax year 2021only. This applies to the taxes that you will pay in 2022. You can claim the Child Care Credit if you work or are actively looking for work and provide childcare for your dependent child under 13 years of age (or no age limit if you are disabled).
4. American Opportunity Tax Credit provides a tax credit of up to $2,500 towards college expenses. A portion of the credit is refundable, while some are nonrefundable. The first 40% of the credit is refundable, but it is limited to $1,000. If your credit reduces your Owings to zero, you can get back to 40% of the remainder, up to $1,000. The remaining 60% is nonrefundable. The student must be enrolled for at least half the time in a qualifying program. This only applies to postsecondary education.
5. In some cases, Premium Tax Credits may be a refundable credit. A refundable premium tax credit may be available to taxpayers with health insurance through the Health Insurance Marketplace. The taxpayer could be eligible for a Premium Credit if they did not receive any qualified assistance from the government during the year. This credit will either lower their owes to the IRS or increase the amount they can get back.