Information on Tax Credits & Tax Credit Allocation
You want to get the maximum refund you deserve when filing an income tax return. One way to get a larger refund is by claiming credits. Tax credits are used to reduce the total tax liability and, in many cases, generate a refund. They are a significant part of your return. In fact, one overlooked credit could mean the difference of hundreds, or even thousands of dollars.
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Nonrefundable Credits
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Nonrefundable tax credits are credits that can reduce tax liability but not generate a refund. This is because a nonrefundable tax credit cannot reduce tax liability below zero. In other words, if the amount of nonrefundable credits is greater than the total amount of tax liability, the portion of the credit that exceeds the tax liability is not refundable. Some common examples of nonrefundable credits are the Child and Dependent Care Credit, Retirement Savings Contributions Credit, Child Tax Credit and certain education credits.
Refundable Credits
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Refundable tax credits play a key role in maximizing your refund check. Refundable credits, unlike nonrefundable credits, are claimed on a tax return to reduce tax liability below zero. The total amount of credits that exceed tax liability is used to generate a refund. The most common and beneficial refundable credits are the Additional Child Tax Credit and the Earned Income Tax Credit.
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Calculating Credits
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Calculating tax credits is possibly the most time-consuming aspect of income tax preparation. It is important to gather all necessary materials before starting your return. Have a calculator on hand to double-check your math. Although the Internal Revenue Service will correct mathematical errors for you, submitting a tax return with mistakes could delay your refund by weeks. Resources, schedules, worksheets and forms for all tax credits are downloaded or ordered in print from the IRS website.
Entering Credit Amounts
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After you have calculated all of your nonrefundable and refundable credits, enter the amounts in your tax return and see your knowledge of tax credits pay off. First enter the amounts of your nonrefundable credits in the Taxes and Credits section on the top of page 2 on Form 1040. Next enter all of your refundable credits in the Payments section on Form 1040. Attach all forms and schedules to your completed Form 1040 before submitting to the IRS.
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