There are many possibilities of incomes on the tax return; one such possibility is having a negative taxable income. Having a negative taxable income is not the end of the world, and there are things that a taxpayer can do to make the situation better, including moving some deductions to tax credits and moving taxable income from future years to the current tax year.
Negative Taxable Income
Taxable income is the amount used by the IRS to calculate how much you owe in taxes on the income you generated (minus all deductions). If you have a negative taxable income, it is counted as a zero taxable income. The IRS does not give a tax refund for having a negative taxable income. Having a negative taxable income is not bad; it simply means that you have no tax liability. No tax liability means you owe zero taxes unless you are self employed and owe FICA taxes. The FICA taxes are calculated below the taxable income line.
There are ways to maximize a refund, even if you have a negative taxable income. If there are certain items listed as tax deductions that are eligible for tax credits, such as education credits, then it may make more sense to change them into tax credits so that you can receive money back from the IRS. The IRS will give money back to a taxpayer in the case the tax payer has no tax liability but does have tax credits.
Tax Credit Example
Let us say that you have a negative $5,000 taxable income, and your tuition and fees deduction was $5,000. In this example, you you would not receive anything back for that tuition and fees deduction. It is possible, however, to claim a different education tax break in the form of a tax credit. The IRS will then send money back to the tax payer, even with a negative taxable income. Education credits available include the American Opportunity Credit, Hope Credit and Lifetime Learning Credit.
If you estimate that you will have a negative taxable income during a tax year, you can do some things that will push your deductions to another year, or increase your earnings during the tax year. This will have the impact of increasing your income so that you can take advantage of your deductions. Earnings that you can take during a certain year include working more, or taking capital gains in the tax year. Deductions that you can push forward to the next year include retirement contributions to a 401K or an IRA.