Tax Credit
Candlefocus EditorThere are three main types of tax credits: nonrefundable, refundable and partially refundable. Nonrefundable tax credits can reduce tax liability to zero, but any remaining balance does not result in a refund of the credit amount. Refundable tax credits allow for a full refund of any remaining balance beyond the tax due. Lastly, partially refundable tax credits allow for a refund of some, but not all, of any remaining balance beyond the tax due.
Nonrefundable tax credits, such as the Earned Income Tax Credit, reduce the amount of taxes owed by individuals earning below certain income thresholds. Other nonrefundable credits are available to offset the cost of home improvements such as replacing heating and cooling systems, adding insulation, or making other energy-saving modifications. Refundable tax credits, such as the federal Child Care Tax Credit, credit taxpayers for the cost of child care for up to 10,000 children.
The American Opportunity Credit is an example of a partially refundable tax credit. It is available to students, or the families of students, for college tuition and related expenses, and is refundable up to the student's tax liability.
Tax credits can significantly reduce taxes and help individuals and businesses save money by reducing their tax burden. These credits are especially significant because they are not subject to the alternative minimum tax, allowing taxpayers to benefit fully from the reduction. However, some tax credits are also subject to phase-out depending on income.
In summary, tax credits are a form of tax reduction available to both individuals and corporations. There are three main types of tax credits, nonrefundable, refundable, and partially refundable. Tax credits can reduce the amount of taxes owed and can significantly help taxpayers save money.