Federal Tax Credits

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Federal Tax Credits

Federal Tax Credits

There are two types of federal tax credits; refundable federal tax credits and nonrefundable federal tax credits.

What are nonrefundable federal tax credits?

Nonrefundable federal tax credits can reduce your income tax to zero. However if the amount of the tax credit is greater than your tax due to the IRS, then you do not receive a tax refund of the additional amount of the credit. Nonrefundable tax credits reduce the tax entered on line 46 (Tax plus Alternative Minimum Tax) on the tax form 1040.

What are refundable federal tax credits?

Refundable federal tax credits can reduce your tax liability to zero and can also result in a tax refund if the tax credit is greater than your tax liability. You do not have to have any tax liability or have any tax withheld to receive the tax refund. Refundable tax credits are treated as payments and are subtracted from the total tax on line 63 (Total Tax) of the form 1040.

Facts about different types of federal tax credits

  • A tax credit is subtracted dollar for dollar from your tax.
  • A nonrefundable credit reduces or eiliiates your income tax but will not give you an additional refund.
  • A refundable credit reduces or eliminates your total tax and also gives you a tax refund or any amount of the credit that is ore than your tax liability.
  • The child tax credit is a nonrefundable credit (the additional child tax credit will be covered later). The credit for child and dependent care expenses is a nonrefundable credit. The earned income credit is a refundable credit.
  • The rules for the qualifying child or person for each credit generally concern the age of the person, thier relationship to you and where they live. However, the rules are different for each credit.
  • The amount of the child tax credit is $1,000 per qualifying child. To claim up to the full $1,000 for the child tax credit, your modified adjusted gross income must be below certain amount for your tax filing status.
  • The amount of the child and dependent care credit is a percentage or your eligible expenses. You can claim the child and dependent care credit only for work related expenses.
  • You have to have earned income (usually wages or salary) to claim the eanred income credit. The amount o the earned income credit is found in the Earned Income Credit Table.
  • You can elect to include or not include ontaxable combat pay as earned income when determining the earned income credit.


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