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Payments and Key Refundable Credits

Chris Test January 21, 2021

Payments

The IRS collects tax payments throughout the year in the form of withholding from tax forms and estimated tax payments.

When taxpayers start a job or receive taxable income, they typically elect to have taxes withheld from these payments to ensure they do not owe money at tax time. This withholding is automatically taken from a taxpayer’s source of income and is reported on the appropriate income document. Withholding is reported on page 2, line 25 a-d of Form 1040.

Taxpayers may also choose to make estimated tax payments to the IRS in addition to any withholding. Self-employed taxpayers are encouraged to make quarterly payments to the IRS for taxes owed since they do not have the option of having taxes automatically withheld. Taxpayers may make quarterly tax payments to the IRS by completing Form 1040-ES. Individuals may also choose to apply a portion of a prior year’s tax refund applied to next year’s tax balance. These payments are found on page 2, line 26 of the Form 1040, and help offset any taxes owed on the Form 1040.

Refundable Credits Recap

Refundable Credits can lower an individual’s taxes owed to zero, and any remaining amount of the refund may be claimed by the credit. Unlike non-refundable credits, refundable credits are not offset by other taxes levied on the return.

Earned Income Tax Credit

The EITC is a refundable tax credit for low-to-moderate income workers to encourage work, offset payroll and income taxes, and help meet basic needs. The cash assistance provided through the EITC is distributed through the tax refund, and along with the Additional Child Tax Credit, lifts an estimated 9.4 million people out of poverty each year. The amount of EITC a taxpayer receives is based on family size, AGI, and earned income level.

EITC Eligibility

Our tax software will automatically calculate the taxpayer’s eligibility for the EITC based on all of the information entered into the return. However, knowing the eligibility requirements is useful for the IRS exam, and useful when consulting with taxpayers about whether or not they received the credit. Reference the charts and tables on page I2-I5 of the Pub 4012 for more detailed information.

The EITC has eligibility requirements that everyone must meet, which are listed below. Additionally, eligibility depends on whether or not the taxpayer has a qualifying child for EITC purposes. The rules for claiming a qualifying child for the EITC is listed below, along with the rules for those without a dependent.

Eligibility Requirements for Everyone:

  • All taxpayers and qualifying children for the EITC must have a valid SSN
  • Filing Status can not be Married Filing Separately
  • Must be a U.S. Citizen or resident alien all year
  • Can not be a qualifying child of another person
  • Must have earned income

Eligibility Requirements for Claiming a Qualifying Child for EITC Purposes:

  • Child must meet the relationship, age, residency and joint return test, but not the support test.
  • Qualifying child can not be used by more than one person to claim the EIC
  • The taxpayer can not be the qualifying child of another person
  • As a general rule, qualifying relative dependents do not qualify the taxpayer for EIC
  • As a general rule, if the dependent meets all of the qualifications to be the taxpayers qualifying child, they are a qualifying child for EITC purposes
  • Some children who do not qualify as the taxpayers dependent will be a qualifying child for EIC purposes
    • Form 8332
    • Children who would otherwise be dependents except for the fact that they provided more than half of their own support during the year.

Eligibility Requirements if you do not have a qualifying child:

  • Must be at least age 25 but under age 65 at the end of the tax year
  • Can not be the dependent of another person
  • Must have lived in the U.S. for more than half the year
  • Can not be the qualifying child of another person

American Opportunity Credit

  • The American Opportunity Credit is a refundable credit for individuals who:
    • Are in their first 4 years of post-secondary education
    • Are considered to be at least a half time student by their education institution
    • Must be pursuing a program leading to a degree or other recognized education credential
    • Must not have been convicted of a felony for possessing or distributing a controlled substance before the end of the tax year
  • The amount of the credit is based on the taxpayer’s total amount of eligible education expenses during the year

American Opportunity Credit: Who Can Claim It?

  • If the individual who is eligible for the American Opportunity Credit qualifies as a dependent AND is claimed on the parents return, then the parent can claim the AOTC.
  • If the individual who is eligible for the American Opportunity Credit qualifies as a dependent AND is not claimed as a dependent, the dependent can claim the AOTC

Eligible Expenses for the AOTC:

  • Expenses qualifying for the American Opportunity Credit include:
    • Tuition
    • Required Enrollment Fees
    • Required Course Materials
    • Books
    • Lab Fees
    • Computer (if required for a course)
  • Expenses that do not qualify for the American Opportunity Credit include:
    • Room and Board
    • Meal Plans
    • Parking Fees, etc.

Additional Child Tax Credit

  • Extension of the Child Tax Credit
    • If the taxpayer has maxed out the non-refundable Child Tax Credit ($2,000 per qualifying child), they can claim part of the remainder as the Additional Child Tax Credit
    • Up to $1400