Today we will have a quick discussion on refundable vs. nonrefundable tax credits. But before we do that, we have to explain the difference between a tax credit and a tax deduction.
A tax credit will reduce the amount of tax you owe, for example if you get a $500 tax credit – the amount of tax you owe is reduced by $500. But a tax deduction reduces the % of income that you must pay in taxes. If your tax bracket is 22% and you have a $500 deduction, you would reduce the amount of tax you owe by $110 (0.22 X 500 = 110).
Do I have you spinning in your chair yet? Well it gets better – in general there are two types of credits – refundable and nonrefundable.
Nonrefundable credits will reduce your tax liability (the amount you owe in taxes) up to zero. However, remember that the IRS doesn’t like negative numbers. So, a nonrefundable credit may be more than the tax liability but will not exceed the taxes owed.
Refundable credits not only reduce the tax liability, but they can also increase the amount returned beyond the amount paid. So, in some instances you will receive a larger refund because of these credits.
This chart is an example of some of the credits allowed for 2018
|Earned Income Tax Credit (ETIC)
|Foreign Tax Credit
|Additional Child Tax Credit
|Child Tax Credit
|The American Opportunity Tax Credit (a portion is nonrefundable)
|Education Credits (Lifetime Learning and a portion of the AOC)
|Small Business Health Care Tax Credit
|Retirement Savings Contributions Credit
|Health Coverage Tax Credit (Affordable Care Act)
|Family Tax Credit (new for 2018)
If you have any questions or wonder if you qualify for any credits, give us a call at 989-859-0346 or text us at 989-859-0811, we would love to hear from you. And you can like us on Facebook for updates and discussion.