You may be familiar with what tax credits are, but you may be wondering:
- What are refundable credits?
- What are non-refundable credits?
These terms have been thrown around a lot lately especially when it comes to the latest recovery rebate credit or some of the latest changes with credits for dependents.
What is a Refundable Tax Credit vs. Nonrefundable Tax Credits?
A refundable tax credit can be paid to the taxpayer even if they don’t owe taxes. Refundable tax credits can actually increase your refund amount if there is any money leftover after your taxes are reduced to zero. Nonrefundable tax credits, on the other hand, reduce the amount that you owe the IRS down to zero but won’t put any extra money in your pocket for any additional amount of the credit leftover beyond what you owe.
Below are a list of common refundable tax credits:
1. Earned Income Tax Credit (EITC) is designed for moderate to low income earners. Generally it is based on income and qualifying dependents. The EITC continues to be a refundable credit meaning even if you don’t owe any taxes you can still get the credit which can boost your tax refund. The maximum tax credit for 2021 tax year – which applies to tax returns filed in 2022 – is $6,728 for taxpayers with three or more qualifying children. This means even if you don’t owe any taxes you could see a boost to your refund of up to $6,728 if you have three or more kids and meet the other eligibility requirements. For tax year 2021 only (the taxes you file in 2022), EITC has been expanded under the American Rescue Plan in several ways. If you have no qualifying children, age requirements have been relaxed for tax year 2021 only. In general, the minimum age has been decreased to 19 down from 25 and the maximum age to qualify was changed from 65 to no maximum age. The special lookback provision was also extended through tax year 2021 and allows you to use your 2019 income instead of your 2021 income which could help you qualify for more Earned Income Tax Credit.
2. Child Tax Credit (CTC) under the American Rescue Plan Act of 2021, was increased to $3,600 for each child under the age of six and to $3,000 for children over the age of 6 to age 17 for tax year 2021 only. Previously, this credit was limited to children 16 and under and had a maximum credit amount of $2,000 per child with $1,400 of the credit being refundable. One of the other changes to the Child Tax Credit for tax year 2021 is this is the first time you may be able to get the credit if you have a child that is 17. The credit is also fully refundable for tax year 2021 instead of it being partially refundable.
3. Child and Dependent Care Credit is typically not refundable. This means that claiming the Child and Dependent Care Credit can reduce what you owe the IRS but you can’t get what’s left over of the credit in a refund once it reduces your taxes to zero. But under the American Rescue Plan of 2021, for tax year 2021only (the taxes you will do in 2022), the Child and Dependent Care Credit will be fully refundable. If you are working or actively seeking work, and you pay childcare for your dependent who is under the age of 13 (no age limit if disabled), you can claim the Child and Dependent Care Credit. Nursery school, private kindergarten, after-school programs, daycare and even summer and winter day camps are all qualifying expenses. The American Rescue Plan made some major changes to the Child and Dependent Care Credit for tax year 2021 only. The expense limit increased from $3,000 for one qualifying individual to $8,000 and from $6,000 for more than one qualifying individual to $16,000, and the percentage used to calculate the credit increased from up to 35% to 50% of expenses so the maximum credit is up to $8,000 ($16,000 x 50%). Since the credit is fully refundable for tax year 2021, you may be able to get a credit of up to $8,000 if you have more than one qualifying individual, even if you don’t owe any taxes!
4. American Opportunity Tax Credit is an education tax credit up to $2,500 for college expenses. Part of this credit is refundable and part of it is nonrefundable. The first 40% is refundable and is capped at $1,000. Meaning if the credit reduces what you owe to 0 then you can have 40% of the remaining amount up to $1,000 refunded to you. The other 60% is nonrefundable. In order to qualify, the student must be enrolled in a qualifying program for at least half time, and it only applies to postsecondary education.
5. Premium Tax Credits can in some situations be a refundable credit. For example, if a taxpayer had health insurance through the Health Insurance Marketplace and was eligible to receive assistance from the IRS toward the cost of monthly insurance premiums but did not, they may be eligible for a refundable Premium Tax Credit. If any eligible assistance was not paid out from the government to the insurance company throughout the year, then the taxpayer may be able to receive a Premium Tax Credit as a refundable credit that will lower the amount they owe to the IRS or increase their refund amount.
In some cases, people may not file their taxes if they make under the income filing thresholds, but if you had taxes withheld from your pay and are eligible for any of these refundable credits mentioned, you may want to file your taxes. Every year the IRS has unclaimed refunds of over $1 billion dollars and much of the unclaimed refunds belong to people who don’t file and may be eligible for unclaimed refunds.
Don’t worry about knowing these tax rules. TurboTax asks you simple questions and gives you the tax deductions and credits you’re eligible for based on your answers. If you have tax questions, you can connect live via one-way video with a TurboTax Live tax expert with an average of 12 years experience. TurboTax Live tax experts are available in English and Spanish, year round and can also review, sign, and file your tax return or you can fully hand your taxes over to them from the comfort of your home.