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Refundable Tax Credits

Many individuals facing filing their income tax returns have had questions regarding refundable tax credits. Uncertainties of what a refundable tax credit is or what a nonrefundable tax credit is often lead to questions like the ones answered below.

What are non-refundable tax credits?

Non-refundable tax credits can reduce an individual’s tax liability down to zero, but are typically limited by the amount of that individual’s tax liability. Also, if they do not end up being used, these credits cannot be carried over to the next tax year

What is the difference between a refundable tax credit and a non-refundable tax credit?

There are two types of tax credits: non-refundable and refundable. A non-refundable tax credit can reduce an individual’s tax liability to zero and nothing more. It will also not offer a refund. A refundable tax credit, on the other hand, can reduce the tax liability to an amount below zero and also offer the individual a refund.

What are the refundable tax credits available?

A few of the available refundable tax credits include Earned Income Credit (EIC), Adoption Tax Credit, First-time Homebuyer Credit, Excess Social Security Credit, Additional Child Tax Credit, Health Coverage Tax Credit, and American Opportunity Educational Credit – which only offers a partial refund.

What is the difference between a tax credit and a tax deduction?

A tax credit may reduce the amount of tax that an individual may be liable for. A tax deduction, on the other hand, may reduce the amount of an individual’s income that is subject to tax. Tax credits are typically more beneficial than a tax deduction of the same amount.

I am on SSI (Supplemental Security Income). Do I qualify for a refundable tax credit?

Supplemental Security Income (SSI) is not taxable income. Also, if SSI is your sole income, you would not be required to file a tax return. Refundable tax credits can be used even if you do not have a tax liability. However, refundable credits such as EIC or Making Work Pay credit would not be available to you because they are based on earned income, and SSI is not earned income. But there are a few credits that SSI candidates could qualify for that include American Opportunity Credit that would depend on if you paid for tuition, or First Time Homebuyer Credit that would apply if you bought a new home.

It is important to know how refundable and non-refundable tax credits work when you are filing your income tax. While a few questions you may have had are answered above, there could be others that are unique to your own case. In such a situation, put your queries to Tax Professionals who can offer insights and information to help you find ways to deal with your case in the best possible manner.
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