If you’re like many Americans, paying taxes doesn’t exactly rank high on your list of favorite things to do. In fact, it’s not on the list at all. For this reason, the phrase “tax credit” may be like music to your ears. However, not all tax credits are the same, according to TaxAudit, which has received multiple high ratings in audit defense reviews. Here are two tax credit options that you can take advantage of: non-refundable and refundable tax credits.
With a non-refundable tax credit, you would take how much you owe in taxes and subtract your allowed credit amount from it. However, the credit amount you use cannot exceed the tax amount you owe. As an example, let’s say that you owe $1,000 in taxes but are eligible to receive $2,000 in a tax credit for dependent/child care. You may claim $1,000 of your tax credit. The other $1,000 you weren’t able to use cannot be refunded.
Note that with some credits that go unused, you can carry them forward to the years ahead, according to tax audit reviews. Meanwhile, other credits that aren’t used cannot be used in the future. Examples of tax credits that cannot be refunded include the foreign tax credit, the child tax credit, and the adoption credit.
A refundable tax credit is similar to its non-refundable counterpart except that any extra amount can be refunded. Examples of credits that are refundable include the premium tax credit and the earned income tax credit. The additional child tax credit and the American opportunity tax credit can also be refunded.
All in all, both types of tax credits are advantageous: The former eliminates your tax liability, and the latter can cause you to receive money back. Either way, expert advice can help you to take full advantage of the various tax credits to which you are entitled from one tax year to the next.