Most of the time, when you think about taxes, you think
about paying them…not about having the IRS give you money. Sometimes, though,
you can be paid by the IRS in the form of what is known as a refundable tax credit. This is a type of tax credit that is basically a payment. You may end
up receiving one if the total of all of your payments is more than your total
tax liability. When that happens, the IRS will give the remaining amount to
you, the taxpayer.
You will know if you have a refundable tax credit because it
will show up in the payments section of IRS Form 1040. If a credit is
nonrefundable, then it will be in the Tax and Credits section of the form. This
is an easy way to tell the two apart.
If you do have a refundable tax credit, you can use it in a
variety of ways. One of the smartest ways to use it is to offset types of taxes
that could not be reduced otherwise. Some examples of these types of taxes
include:
·
The self-employment tax
·
The nanny tax
·
The surtax on early distributions of retirement
savings
·
Net investment income tax
·
Additional Medicare tax
Obviously, a refundable tax credit can be a really good
thing that can work in your favor. So, what counts as a refundable tax
credit? While there are some variations
based on your specific situation, the following can usually result in
refundable tax credit:
·
Credit for federal income tax withheld
·
Up to 40% of the American Opportunity Credit
·
Credit for estimated tax payments
·
The earned income credit
·
Credit for extension payments
·
The premium assistance tax credit
·
Credit for excess Social Security withholding
·
Credit for excess Social Security tax withheld
·
Credit for federal taxes on fuels
·
The health coverage tax credit
·
Credits from Form 2349
If you are curious about whether or not a refundable tax credit
is coming your way or you want to use credits that you have already received in
the best possible way, be sure to speak with an accountant. If used correctly,
you can really do a lot of great things with and through your refundable tax
credits.
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