Tax season - refundable v. non-refundable tax credits
Order is very important to the process when preparing your taxes. There are two types of tax credits that may be available to taxpayers – refundable and nonrefundable. Refundable tax credits, when applied, may reduce the taxpayer’s tax liability below zero dollars ($0), and potentially a refund if the credit is large enough. A nonrefundable tax credit, when applied, enables a taxpayer to reduce their tax liability to zero dollars ($0), but no further.
The IRS requires a taxpayer to meet certain requirements to be eligible for these tax credits, and knowing what they are is important. In addition to others, the most common requirement centers around household income. That household income threshold can either span wide enough to capture high wage earners or can be tied to the federal poverty line set forth by the U.S. Department of Health and Human Services. Let’s review a few of the most common tax credits. Related forms and publications for 2024 are at the end.
Refundable credits
Premium tax credit (PTC) – helps eligible individuals and families cover the premiums for their health insurance purchased through the Health Insurance Marketplace. Taxpayers who purchased insurance through the Health Insurance Marketplace, are required to file a tax return to claim the premium tax credit whether or not the option to get advance payments of the PTC paid directly to your insurer was selected. The PTC factors in the federal poverty line referenced above. Forms and instructions help the taxpayer determine the applicable amount. (*IRS publication reference at the end of the article).
Earned income credit (EIC) – a taxpayer may claim this credit if their income is low-to-moderate. This credit helps to reduce the amount of tax potentially owed. The credit will fluctuate if the taxpayer has children, dependents, are disabled or meet other criteria. Important to note that “any refund you receive because of the EIC can’t be counted as income when determining whether you or anyone else is eligible for benefit or assistance, or now much your or anyone else can receive, under any federal program or under any state or local program financed in whole or in part with federal funds. Programs include: TANF, Medicaid, SSI, SNAP, or low-income housing. In addition, when determining eligibility, the refund can’t be counted as a resource for at least 12 months after you receive it. Check with your local benefit coordinator to find out if your refund will affect your benefits.” (*IRS publication reference at the end of the article). IRS chart for the tax year 2024 provides more details.
Nonrefundable credits
Child tax credit (CTC) – nonrefundable tax credit that can be used to help families with qualifying children. The IRS defines a ‘qualifying child’ as:
Under the age of 17 at the end of the year
Taxpayer’s son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of one of these (grandchild, niece or nephew)
Provided no more than half of their own financial support during the year
Lived with taxpayer for more than half the year
Properly claimed as taxpayer’s dependent on tax return
Not filing a joint return with their spouse for the tax year or file it only to claim a refund of withheld income tax or estimated tax paid
Have been a U.S. citizen, U.S. national or U.S. resident alien
For 2024, households qualify for the full amount of the Child Tax Credit for each ‘qualifying child’ if they meet all eligibility factors and the annual income is no more than $200,000 or $400,000 married filing jointly. The credit is up to $2,000 per qualifying child. Remember, because it is nonrefundable, any excess credit will not allow the taxpayer to drop below zero dollars.
The Child Tax Credit has an opportunity called the Additional Child Tax Credit (ACTC). Certain taxpayers may be able to utilize this refundable credit. There are requirements a taxpayer must clear, but the credit is limited to $1,700 per ‘qualifying child.’
Mortgage Interest Credit (MIC) – The nonrefundable credit is for holders of qualified mortgage credit certificates issued by state or local governmental units or agencies. According to the National Council of State Housing Agencies, the Mortgage Credit Certificate program is a homebuyer assistance program designed to help lower-income families afford homeownership (download the NCSHA and FDIC one pagers). Homebuyers participating in this program can claim a dollar-for-dollar tax credit for a percentage of the mortgage interest paid that year. The Mortgage Credit Certificate (MCC) percentage is administered by housing finance agencies in each state, and the tax credit is capped at $2,000. Locate your state housing agency here.
To realize the greatest possible refund, the order of the credits is critical. Most tax software should do this automatically, but education and awareness will help us all be better consumers. Tax stuff is complicated, but endeavoring to know something is much better than closing our eyes to everything. Let us know if you have any questions. Perhaps we can figure it out together. 😊
The 50% uncomfortable, 70% incremental, 100% vital principle still apply. What research do you need to conduct or documents to you need to pull together? Make the effort because you are worth it! If you want to talk about it, drop us a note at letstalk@studiomfinancial.net. Until we meet…keep working on the change.