Refundable Credits are the best, because what ever isn't used to pay a tax liability, gets refunded to the client! Unlike non-refundable credits that can only be used to pay decrease income tax liability to zero, nothing gets refunded. Still beneficial, but not as sweet as a refundable credit.
The refundable Credits are powerful, and very valuable to the taxpayer. They are often filed for fraudulently by some unscrupulous people trying to cheat the system. Because of the value and the amount of fraud that takes place, the IRS does look at returns with these credits more than returns without these credits. Making an error can not only cause the taxpayer to pay back the credit plus interest, but also hefty fines/penalties.
The refundable Credits are:
*In 2021 only, the dependent care credit was fully refundable, along with all the Child Tax Credits (with a higher value as well). These credits have reverted back to the way they used to be. There are people trying to make the 2021 changes permanent, but as of today when I am typing this, they are no longer refundable (or fully refundable).
The refundable Credits are powerful, and very valuable to the taxpayer. They are often filed for fraudulently by some unscrupulous people trying to cheat the system. Because of the value and the amount of fraud that takes place, the IRS does look at returns with these credits more than returns without these credits. Making an error can not only cause the taxpayer to pay back the credit plus interest, but also hefty fines/penalties.
The refundable Credits are:
- Earned Income Tax Credit (EITC)
- Advanced Child Tax Credit
- American Opportunity Tax credit (education credit)
- Premium Tax Credit (Marketplace)
*In 2021 only, the dependent care credit was fully refundable, along with all the Child Tax Credits (with a higher value as well). These credits have reverted back to the way they used to be. There are people trying to make the 2021 changes permanent, but as of today when I am typing this, they are no longer refundable (or fully refundable).
Earned Income Tax Credit (EITC) PUB 4012 (Section I) *Taxslayer automatically calculates the EITC and determines eligibility based off what is entered in the demographic section and income section.
What is The Earned Income Tax Credit (EITC)? Its a credit that helps low- to moderate-income workers and families get a tax break. This credit can reduce the taxes owes – and maybe increase the refund.
How much is the credit? It can be as high as $6,935 for tax year 2022! The amount of EITC received depends on a few things: amount of earned income, filing status, and family size.
What is The Earned Income Tax Credit (EITC)? Its a credit that helps low- to moderate-income workers and families get a tax break. This credit can reduce the taxes owes – and maybe increase the refund.
- The Earned Income Tax Credit was established in 1975 to offset the adverse effects of Social Security and Medicare payroll taxes on working poor families and to encourage the working poor to increase their earnings. (its an incentive)
- Administered through the federal income tax system, the EITC is a refundable tax credit.
- If the amount of a family's credit exceeds its income tax liability, the family receives a refund check for the difference from the Internal Revenue Service.
How much is the credit? It can be as high as $6,935 for tax year 2022! The amount of EITC received depends on a few things: amount of earned income, filing status, and family size.
- Earned Income. This credit is designed for low-income working families. So, they have to first, have earned income. No earned income, no credit. (Designed to get people off welfare and working).
- Work a little, get a little. (bottom left of graph)
- The more earned, the more EITC you get. (see it start to climb--it eventually levels off (sweet spot some call this plateau)
- Eventually, as income continues to grows, the credit will be reduced as they are doing better financially and don't need as much assistance. (right side of graph)
- Filing Status & Family Size also affect the amount of the EITC credit received and having children is not a requirement for the EITC. The EITC increase as number of children increase--the credit is maxed by income with 3 children.
Here is a table showing the Maximum Earned Income Credit by family size and filing status for 2022. This is if their earned income hits the 'sweet spot'. **You do not need to know these numbers.. just sharing for those interested and want to learn more
Who is Eligible for the EITC? See PUB 4012 Section I (rules in 2021 were a little different--2022 is back to old rules) I have posted a picture of the 2020 requirements as this is what 2022 will revert back to.
Married filing separate do not qualify unless:
Please review PUB 4012 (Section I)
You can also learn more from the IRS irs.gov/credits-deductions/individuals/earned-income-tax-credit-eitc
- they have a child they paid over 50% of the support for,
- and they lived with the child for over 50% of the year,
- and they DID NOT live with their spouse AT ALL in the last 6 months of the tax year,
- and they cannot file Head of Household because they did not pay over 50% of the cost of the home (else they could file Head of Household).
Please review PUB 4012 (Section I)
You can also learn more from the IRS irs.gov/credits-deductions/individuals/earned-income-tax-credit-eitc
Advanced Child Tax Credit (ACTC)
Advanced child tax credits are the refundable portion of the Child Tax Credit (CTC). It is capped at $1,400 per qualifying child.
Basically, for each qualifying dependent, they are entitled to $2,000 in Child Tax Credits. These credits are first used to pay off any income tax liability (and Marketplace Repayment). If the full Child Tax Credit (CTC) is not used because the tax liability is LESS THAN the CTC, then the remainder (up to $1,400 per child) is issued as a refundable credit. See image below for an example showing how this works.
Advanced child tax credits are the refundable portion of the Child Tax Credit (CTC). It is capped at $1,400 per qualifying child.
Basically, for each qualifying dependent, they are entitled to $2,000 in Child Tax Credits. These credits are first used to pay off any income tax liability (and Marketplace Repayment). If the full Child Tax Credit (CTC) is not used because the tax liability is LESS THAN the CTC, then the remainder (up to $1,400 per child) is issued as a refundable credit. See image below for an example showing how this works.
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American Opportunity Tax Credit
The most beneficial Education Credit. See PUB 4012 To learn about the different education credits, which we see a lot of, click the image. |
Education Credits |
Premium Tax Credit (Marketplace repayment) *the system does all the calculations--so don't fret
What is it? First, let me explain a few terms & how Marketplace works.
Policy Premiums-How much the health insurance policy costs for the taxpayer and/or family members
Subsidy - How much of the policy premiums the government pays on behalf of the taxpayer and/or family members.
**Just an FYI-- the reverse can also happen. If the taxpayer makes more than they 'guesstimated', they may have to pay back a portion, or all of the subsidy they received (Advanced premium tax credits). This repayment is called Excess advance premium tax credit repayment.
Learn More by visiting my Affordable Care Act Page
What is it? First, let me explain a few terms & how Marketplace works.
Policy Premiums-How much the health insurance policy costs for the taxpayer and/or family members
Subsidy - How much of the policy premiums the government pays on behalf of the taxpayer and/or family members.
- Monthy Premium Tax Credit- this is the amount of subsidy paid each month for the taxpayer and/or family.
- How much subsidy is allowed? The amount of subsidy allowed is based on the size of the tax-family, total income of the tax-family, where the taxpayer lives, policy premiums for the policy chosen, and the cost of the 2nd lowest cost Silver plan policy (used as a reference for calculations). Subsidy could be anywhere from 0-100% of the cost of the policy.
- Advanced Premium tax credit is how much subsidy received monthly.
- Premium Tax Credit- is a credit for when NOT ENOUGH subsidy was provided throughout the year and the taxpayer is OWED some of the policy premiums they had paid back.
- Example: Say policy was $950 a month. Based off what client 'guesstimated' their income was to be for the tax year, they were allowed a subsidy of $800 per month (Advanced Premium Tax Credits). Therefore, the taxpayer paid the difference of $150 per month. (800 per month x 12 months = $9,600 in subsidy (Advanced Premium Tax Credits)
- Client actually earned less than 'guesstimated" (because of illness, layoff, hours cut, whatever the reason) and based off the total income on their tax return, the software determines they should have received $11,100 in subsidy--since they taxpayer received less than this, they get the difference ($11,100-9,600=$1,500) as a refundable credit on their tax return.
- This refund of subsidy is called the Premium Tax Credit
**Just an FYI-- the reverse can also happen. If the taxpayer makes more than they 'guesstimated', they may have to pay back a portion, or all of the subsidy they received (Advanced premium tax credits). This repayment is called Excess advance premium tax credit repayment.
Learn More by visiting my Affordable Care Act Page