Deductions, Credits, and Finishing a Return
Tax Credits and Key Non-Refundable Credits
Non-Refundable vs. Refundable Tax Credits
Tax credits exist to help reduce a taxpayer’s amount of taxes owed based on a variety of factors, including household members, income level, and certain qualified expenses. Tax credits may either be refundable or non-refundable.
Non-Refundable tax credits help reduce a taxpayer’s tax liability, or total taxes owed, to zero. For example, if a taxpayer qualifies for a $1,000 non-refundable credit, but only owes $600 in taxes, they will receive $600 of the credit and their tax owed will be reduced to zero. However, some tax credits have both a non-refundable and refundable portion.
Non-Refundable Credits only apply to income taxes.
While non-refundable credits help reduce taxes owed based on income, taxpayers may be subject to additional taxes after factoring in non-refundable credits. These “Other taxes,” are added to the return after factoring in non-refundable credits.
Refundable taxes reduce tax credits to zero, and the remainder may be claimed as a refund. For example, if a taxpayer qualifies for a $1,000 refundable credit and owes $600 in taxes, their tax bill will be reduced to zero and they will be eligible to receive the remaining $400 as a refund.
The most common non-refundable credits you will see at VITA sites include:
- Child Tax Credit*
- Credit for Other Dependents
- Child and Dependent Care Credits
- Education Credits
- Lifetime Learning
- American Opportunity Credit*
- Residential Energy Credit
*These tax credits have a refundable portion available for taxpayers if they are eligible and do not use the full non-refundable credit.
Child Tax Credit
- The Child Tax Credit provides a $2,000 credit to taxpayers with qualifying children. The child in question must:
- Meet the same qualifications as a qualifying child dependent (a qualifying relative will not qualify for this credit).
- Be under the age of 17
- Must have a valid Social Security Number for employment
- A taxpayer can claim the Child Tax Credit if they can and do claim a dependency exemption for the child
- A taxpayer may receive the credit for each eligible dependent on the return, with a maximum value of $6,000.
- If a taxpayer maxes out their tax liability, they may be able to claim a remainder of the Child Tax Credit as the (refundable) Additional Child Tax Credit.
Credit for Other Dependents
- Non-refundable credit up to $500 per qualifying dependent
- Dependents who do not qualify for the Child Tax Credit may be eligible for the Credit for Other Dependents, this includes:
- Qualifying child dependents over the age of 17
- Qualifying relative dependents regardless of age that has a valid ID (ATIN, ITIN, SSN).
Child and Dependent Care Credit
- Credit valued on the number of qualified expenses paid for childcare for an eligible individual and to and eligible child care provider
- Childcare expenses must have occurred when the taxpayer was working, looking for work, or a full-time student
- An eligible individual must:
- Be under age 13 when the expenses were incurred
- Be an individual incapable of self-care that the taxpayer can claim as a dependent
- A spouse who was physically incapable of self-care
- Qualifying expenses include:
- Expenses for daycare (Pre-K and under) or after school care
- Expenses for a summer day camp
- Non-qualifying expenses include:
- Expenses to an overnight camp
- Expenses to attend kindergarten or a higher grade
There are two main types of education credits, the Lifetime Learning Credit (Non-Refundable) and the American Opportunity Credit (Non-Refundable and Refundable). For now, we will focus on the Lifetime Learning Credit.
Lifetime Learning Credit
- The Lifetime Learning Credit is a non-refundable tax credit based on qualifying tuition expenses
- Individuals do not have to be in a degree program to qualify
- Available to individuals who have been in school for more than four years.
Retirement Savings Credit
- Non-Refundable Credit available to those who make independent contributions to a retirement account
- Most taxpayers will make their contribution through their employer, and qualifying contributions will pull through from the W-2
- Based on Box 12 codes
Residential Energy Credit (Non-Business)
The nonbusiness energy property credit is available for certain qualifying energy efficiency improvements or
residential energy property costs. The qualifying items are:
- Biomass stoves
- • Heating, ventilating, air-conditioning (HVAC)
- • Insulation
- • Roofs (metal and asphalt)
- • Water heaters (non-solar)
- • Windows and doors
- The nonbusiness energy property credit is subject to the following limitations:
- •The total combined credit limit for all tax years after 2005 is $500, and the combined credit limit for windows is $200.
- •The maximum credit for residential energy property costs is $50 for any advanced main air circulating fan; $150 for any qualified natural gas, propane, or oil furnace, or hot water boiler; and $300 for any site of energy efficient building property.
- It is important to note that:
- The credit is only available for existing homes that are the taxpayer’s main home – new construction and rentals do not qualify. The taxpayer must own the home to qualify.
- Amounts provided by subsidized federal, state, or local energy financing do not qualify for the credit.