It's no wonder why some people actually look forward to filing their taxes each year. Many taxpayers actually pocket a hefty tax refund check thanks to refundable tax credits. These are tax benefits that taxpayers can claim, even when the credit exceeds their tax liability. While there are a number of credits that tax filers can claim, the Earned Income Credit is the most common one, often worth several thousand dollars for eligible taxpayers. While tax credits can be confusing, make sure you are getting what you are eligible for — getting money at tax time makes tax time a whole lot more fun.
Refundable vs. Non-Refundable Credit
Tax credits reduce your tax liability dollar-for-dollar, and are either refundable or non-refundable. Non-refundable tax credits reduce the taxpayer's tax liability only. This means that if someone receives a non-refundable tax credit for $1,000 and owes $3,000 in taxes, the amount of tax owed will be reduced to $2,000. However, if this same person owes $0 in taxes, they will not receive the $1,000 non-refundable tax credit because they have no tax liability. With a refundable tax credit, the taxpayer does not have to owe any taxes to get the tax credit. If someone earns a $1,000 refundable tax credit and has no tax liability, they will receive the $1,000 refunded to them as a payment.
The Earned Income Credit
The Earned Income Credit is a refundable credit that benefits people who are working, but earning low-to-moderate incomes. As the name of this credit suggests, people have to earn an income during the tax year to qualify for this credit. This income must be earned from working, either for an employer or from self-employment. Income derived from unearned sources, such as child support, unemployment benefits, alimony, Social Security or retirement income does not qualify someone for this credit. Additionally, you must have a qualifying child or meet specific criteria to qualify for the credit on your own.
Show Me the Money
Calculating this credit can be complicated. Taxpayers often rely on tax preparation software to figure out the exact credit amount. However, if you qualify for this credit, you can also ask the Internal Revenue Service to calculate the credit for you, or use the Earned Income Credit Worksheet. The maximum earned income credits for 2011 were: $464 for someone with no qualifying child; $3,094 for someone with one qualifying child; $5,112 for someone with two qualifying children; and $5,751 for someone with three or more qualifying children.
Other Refundable Credits
Refundable tax credits change over time but are meant to be incentives for certain things or to help ease the burden of many taxpayers. In 2011, the largest refundable tax credit was the adoption credit, worth up to $13,360. This credit was changed from a non-refundable tax credit, to a refundable tax credit for 2010 and 2011 by the Affordable Care Act. In recent years, some qualifying taxpayers have benefited from the Child Tax Credit — earning up to $1,000 per qualifying child; the American Opportunity Credit — a 40 percent refundable credit for eligible post-secondary tuition and expenses; a Health Coverage Tax Credit for displaced workers; and the First Time Homebuyer Credit.
- Internal Revenue Service: EITC-Don't Overlook It
- Time.com: A Refundable Tax Credit that Many Overlook
- Internal Revenue Service: EITC Homepage
- US Department of Health & Family Services: A Refundable Federal Income Tax Credit for Low-Income Working Individuals and Families!
- Internal Revenue Service: Adoptive Parents - Don't Delay Your Adoption Credit Refund
- US Tax Center: Refundable Tax Credits
- 1040.com: Tax Credits
Sara Mahuron specializes in adult/higher education, parenting, budget travel and personal finance. She earned an M.S. in adult/organizational learning and leadership, as well as an Ed.S. in educational leadership, both from the University of Idaho. Mahuron also holds a B.S. in psychology and a B.A. in international studies-business and economics.