Tax Credits - Refundable and Nonrefundable

Question 1

Name the most common Nonrefundable Tax Credits

Answer 1

• Child and dependent care credit
• Adopton tax credit
• Lifetime learning credit
• Retirement savings contributions credit
• Foreign tax credit
• Credits related to energy efficiency

Question 2

Name the most common refundable credits?

Answer 2

• American opporunity credit (partially refundable)
• Earned income credit
• Child tax credit(partially refundable)
• Premium tax credit/advanced premium tax credit

Question 3

Child and dependent care credit

Answer 3

• Nonrefundable
• Expenses paid to have a child or other dependent taken care of while the taxpayer (or taxpayer’s spouse) worked, looked for work, or attended school full time.
• Must have earned income GREATER than any dependent care expenses
• Imputed income received for while being at school full-time, looking for work, or unable to care for themselves
• NOT available to married, filing separately
• Qualifying child is dependent child age 12 OR YOUNGER
• A qualifying NONCHILD may include other individuals who are phsyically/mentally incapable of self-care
• Person whom the credit is claimed must have lived with taxpayer for more than half the year
• Credit is based on qualifying dependent care expenses of up to $3k for one qualifying dependent and $6k for two
  
  • This could be allocated between the two in any manner
• Any qualifying expenses are reduced by any tax-advantaged money used to pay for those expenses (FSA for dependent care)

Question 4

Adoption tax credit

Answer 4

• For qualified adoption expenses paid to adopt an eligible child
• Any credit in excess of the tax liability may be carried forward for up to FIVE YEARS (since it is nonrefundable)
• Qualified expenses include:
  
  • adoption fees
  • legal fees
  • travel expenses
  • others directly related to the adoption
  • DOES NOT INCLUDE adoption of SPOUSE’S child
• May be claimed BEFORE adoption is LEGALLY FINAL
• Income limitation
• Remember, a credit and an exclusion for the SAME EXPENSES CANNOT BE CLAIMED.

Question 5

Lifetime learning credit

Answer 5

• Nonrefundable
• For any postsecondary students
• $2000 PER TAX RETURN
• Expenses capped at 10k and 20% is how it’s calculated

Question 6

American Opportunity Credit

Answer 6

• Partially refundable
• Full-time, first four-year students of postsecondary school
• Max credit of $2,500 PER STUDENT
• Up to 40% is refundable
• First 2k is 100% included and then 2nd 2k is 25%

Question 7

Retirement savings contributions credit

Answer 7

• Nonrefundable
• For eligible retirement plans, including both IRAs
• Available as long as you are over 18, not claimed as dependent, and have AGI below certain thresholds
• Contributions are capped 2k and reduced by any retirement distributions from current and prior two years

Question 8

Foreign Tax credit

Answer 8

• Nonrefundable
• Claimed for required foreign taxes paid or accrued during the same period for which US taxes are incurred.
• Can choose to claim this credit OR itemized deduction for foreign tax paid
• Credit is the SMALLER OF
  
  • Foreign taxes paid
  • Amount of US tax assessed on the foreign income
• Unused credits can be carried back ONE YEAR and CARRIED FORWARD 10 YEARS

Question 9

Energy Credits

Answer 9

• For solar electric and solar water heating equipment for those who purchase and install such equipment
• EV
• Nonrefundable

Question 10

Earned income credit

Answer 10

• Refundable
• For LOWER INCOME indivdiuals with AND without qualifying children in the home

Question 11

Child tax credit

Answer 11

• Refundable (partially)
• Has phase outs
• Max credit of $2000 PER CHILD who is:
  
  • UNDER age 17 at end of tax year
• Must have earned income of at least $2,500

Question 12

Premium tax credit/advanced premium tax credit

Answer 12

• Refundable
• Must meet ALL requirements:
  
  • Household income less than 400% of fed poverty line
  • Do NOT have access to affordable health insurance coveraeg through work, government, or other sources
  • Have purchased health insurance through the Health Insurance Marketplace and are making monthly premium payments
• Can be claimed at the time the income tax is prepared OR
  
  • Can be estimated and taken as the Advanced Credit to help offset costs of health insurance premiums throughout the year