Can You Get More Money Back on IRS Taxes Than You Paid In?
They say you get out what you put in, but when dealing with the IRS the outcome can be a lot sweeter than that old adage indicates. The idea that your refund is limited by the amount of federal tax you pay isn't true in all cases. If you take advantage of refundable tax credits on your return, then you may very well receive a refund which is greater than your federal tax paid. Everyone who files taxes should familiarize themselves with the system to learn which financial mechanisms can fatten refunds.
Other People Are Reading
-
Purpose
-
While the main purpose of taxation is to raise revenue, it is also used to promote and discourage certain types of conduct. This often takes the form of a tax "credit." A tax credit determines the amount by which a taxpayer's tax will be reduced because of a specific behavior. For example, the Earned Income Credit (EIC) provides a benefit to low-income households, encouraging household members to seek work.
Exemptions, Deductions and Credits
-
The US employs a progressive tax system, and your tax rate is based upon the bracket into which your income falls. However, the amount of tax you owe can be reduced by exemptions, deductions and/or credits. An exemption immediately reduces your taxable income, and filers can claim exemptions for themselves, a spouse and each dependent. Itemized tax deductions are expenses incurred during the tax year that the IRS allows you to deduct on your tax return. The value of a deduction depends on your tax bracket. If you prefer, you can accept the IRS's standard deduction which is a prescribed deduction amount that corresponds to your filing status. Credits, on the other hand,are a dollar-for-dollar reduction in the amount of taxes you owe. Since credits are subtracted from the actual tax for which you are liable, they can be much more valuable than deductions that provide only a percentage saving.
-
Refundable vs. Nonrefundable Credits
-
There are two kinds of tax credits: refundable and nonrefundable. Nonrefundable credits are applied against taxes already withheld or paid during the tax year. Refundable credits are treated like an advance payment on your taxes. This means that you can apply a refundable credit even if it exceeds the amount you actually paid. Thus, refundable credits can reduce your tax liability to below zero, allowing for a tax refund of more than you paid in.
Examples
-
An example of a refundable credit was the First Time Homebuyer Credit that applied to the 2009 tax year. The purpose of the credit was to rejuvenate a lagging housing market by giving first time home buyers a tax credit of $8,000. Since there were no income requirements attached to this credit, it would be theoretically possible to receive more in credit than the taxpayer had paid in. An example of a nonrefundable credit is the Child and Dependent Care Credit because eligibility is based on taxable compensation. Consequently, the credit can only be applied to taxes already paid.
-
References
- Photo Credit Creatas/Creatas/Getty Images
