Types of Tax Credits that can Reduce your Tax Bill
Author: Jenny Shilling
Tax credits can make a significant effect on your Federal income taxes. A tax credit is a dollar-for-dollar credit. If you qualify for a $500 tax credit, $500 will be taken off your tax bill. In comparison, a tax deduction only reduces your tax bill by the percentage of your marginal tax bracket. There are two types of tax credits available, refundable and non-refundable. Most tax credits fall into the latter category.
Refundable Tax Credits
These credits are treated the same as a tax payment. A refundable credit is subtracted from the amount of taxes you owe after deductions. These credits can reduce your tax liability. If the total tax liability is below a zero amount, the difference will be returned to you as a tax refund. If you happen to already be receiving a tax refund, this amount will be added to it.
Examples of refundable tax credits:
- Additional Child Tax Credit
- Earned Income Tax Credit
- Health Coverage Tax Credit
- Small Business Health Care Tax Credit
Non-Refundable Tax Credits
These tax credits are subtracted from your tax bill up to the amount you owe. A non-refundable tax credit cannot reduce your bill past a zero balance.
Examples of non-refundable tax credits:
- Adoption Tax Credit
- Child Tax Credit
- Foreign Tax Credit
- Mortgage Interest Tax Credit
Partially Refundable Tax Credits
There are some credits that fall into both categories. The American Opportunity Tax Credit is a partially refundable credit. If this credit reduces your liability past zero, you can receive up to 40% (up to $1000) as a refund.
Because tax law changes from year to year it is important to do research and planning prior to filing your tax return. Hiring a qualified tax professional will ease your burden as they are trained in the yearly modifications. If you have any questions regarding your taxes, credits, or deductions please contact us. The Tax Deadline is rapidly approaching and our specialists are available to provide the answers you need.
