Refundable Versus Non-Refundable Tax Credits

Military and Reserves

Refundable Versus Non-Refundable Tax Credits

TWO TYPES OF CREDITS
There are two types of credits: non-refundable and refundable. Non-refundable tax credits can reduce tax owed to zero, but can’t be used to get a refund. A refundable credit, such as the Earned Income Credit (EIC), can reduce your tax below zero and provide you with a refund.

NON-REFUNDABLE TAX CREDITS
Non-refundable tax credits and their maximum amounts include:

•adoption expenses credit – up to $10,390 per eligible child;

•child and dependent care credit – depending on the adjusted gross income level, 20 percent to 35 percent of qualifying expenses;

•credit for the elderly or disabled – amount varies based on age, income, and filing status;

•electric vehicle credit – 7.5 percent of the cost of new electric vehicle, for a maximum $3,000 credit;

•Hope Scholarship credit – up to $1,500 per student;

•Lifetime Learning credit -- 20 percent of the first $10,000 of eligible expenses, for a maximum $2,000 credit; and

•qualified retirement savings contributions credit – 10 percent to 50 percent of up to $2,000 in contribution, depending upon income.

In most cases, the child tax credit is non-refundable but in certain cases, it is partially refundable for lower-income families. The credit is up to $1,000 per child.

REFUNDABLE TAX CREDITS
The EIC is the most common refundable tax credit. Individuals with zero taxable income who are eligible for the EIC should file a tax return to receive the refund benefits of this credit.

Less commonly used refundable tax credits include the federal tax paid on fuels credit and the health coverage tax credit. The fuels credit allows farmers and other business owners to claim a credit of 18.4 cents per gallon of gas for farming and off-highway business use.

The health coverage tax credit was created by the Trade Act of 2002 and can pay nearly two-thirds of eligible individuals’ health plan premiums. Eligible taxpayers include workers who lose their jobs because of international trade and are eligible for certain trade adjustment assistance (TAA) benefits, workers who are eligible for benefits under the Alternative Trade Adjustment Assistance (ATAA) program, and anyone over 55 who receives benefits from the Pension Benefit Guaranty Corporation (PBGC). The credit can be claimed monthly or at one time on the 2004 tax return.

TAX PLANNING IS KEY
CPAs say year-round tax planning is the key to taking advantage of all available tax credits and deductions.

To find out more about these credits, contact a CPA or visit the Internal Revenue Service Web site at www.irs.gov.