Anyone who pays more than she owes can get the IRS to refund the excess withholding. Some people are in a position to go further and get more money back than they had withheld. To pull off this trick, you have to qualify for one of the tax credits that allow you to receive more than you owed. This rare type of tax credit is known as a "refundable" tax credit.
You subtract credits directly from your tax bill. If your tax credits are larger than your tax bill, the IRS may cut you a check for the excess if you qualify for one of the "refundable" credits, such as the Child and Dependent Care Credit, the Child Tax Credit, the Retirement Savings Contributions credit, and the Earned Income Tax Credit. Most credits are not refundable, although some allow you to carry over the remainder of the tax credit to deduct from taxes in later years. Other tax credits are "use it or lose it" -- you can use them for one tax year only.
One of the most common refundable credits is the Earned Income Tax Credit, which pays money to certain low- and moderate-income workers. In 2012, for instance, a childless couple can claim the credit if they earn less than $19,190 and file a joint return; filing separately disqualifies you. You have to earn income for the year to qualify and if you have investment income it must be less than $3,200. The maximum credit, for a family with three children, is $5,891. With a $4,000 tax bill, that credit would give you a net gain of $1,891.
The American Opportunity Credit, which is set to expire at the end of 2012 unless Congress acts to renew it, is an example of a "partially refundable" credit. It covers up to $2,500 of the costs of college. When the credit is more than the tax you owe, however, you can't get more cash from the IRS than 40 percent of the credit: If you claim $2,000, you'd only be able to get $800 more than you paid in.
Tax credits expire, but the government also creates new ones. Visit the IRS website to find out about currently available credits you can qualify for. The website also provides details on the standards you have to meet to claim the credit. If you qualify, you must fill out the relevant forms at tax time. Subtract the credits from your taxes and report how much of a payment you're entitled to. Keep any documentation that proves you're entitled to the credit, just in case the IRS audits your return.
- How Will Having a Child Affect My Taxes?
- Child Care Deduction Vs. Credit
- What if You Forget to Put a W-2 on Your Taxes?
- How to Confirm Your State Tax Refund Amount From a Previous Year
- What Causes an Audit for Earned Income Credit?
- How to Make a Budget With a Commission Income
- Do You Earn Tax Credit on a Leased Car?
- Tax Cut Vs. Tax Credit
- What to Do If I Failed to Pay Taxes for Several Years?
- Types of Exterior Doors That Qualify for Tax Credits