Question

What is the difference between a refundable versus non-refundable tax credit? Describe the various business-related and individual tax credits available to taxpayers? What are some of the requirements and limitations related to these tax credits?

Answer 1

Refundable Tax Credit - Reduce your tax liability to below zero. If the amount of a refundable tax credit is more than the amount of taxes due, the difference will be given back to you as a tax refund.

Here are some examples of refundable tax credits:

• Additional Child Tax Credit
• Earned Income Tax Credit (EITC)
• Health Coverage Tax Credit
• Small Business Health Care Tax Credit

Nonrefundable Tax credit - It is subtracted from your income tax liability, up to the total amount you owe. However it cannot reduce your tax balance beyond zero. Any unused portion of a nonrefundable tax credit will expire in the year the credit is claimed and cannot be carried over.

Some examples of nonrefundable tax credits include:

• Adoption Tax Credit
• Child Tax Credit
• Foreign Tax Credit
• Mortgage Interest Tax Credit

Business related credit

i) Investment Credit

ii) Work opportunity Credit

iii) Low Income housing credit

iv) Energy Efficient home credit

v) Credit for Small Employer Pension Plan Startup Costs

Individual tax credit

i) Family and Dependent credit - Include Adoption credit, Child tax credit, Earned income tax credit

ii) Income and Saving credit - Include Foreign tax credit, Excess Social Security and RRTA Tax Withheld

iii) Homeowner Credit - Include Mortgage Interest Credit, Residential Energy Efficient Property Credit, Low-Income Housing Credit (for Owners)

iv) Health care credit

v) Education credit