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Tax Credits Explained: Refundable vs Non-Refundable, Foreign Tax Credit, Child & Dependent Care, Retirement, Child Tax C

Learn about refundable and non-refundable tax credits, including Foreign Tax Credit, Child & Dependent Care Expenses Credit, Retirement Savings Contribution Credit, Child Tax Credit eligibility and calculation. Get insights on additional child tax credit eligibility and how to claim them effectively.

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Tax Credits Explained: Refundable vs Non-Refundable, Foreign Tax Credit, Child & Dependent Care, Retirement, Child Tax C

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  1. CREDITS:dependent care, CTC, etc

  2. NON-REFUNDABLE CREDITS • Non-refundable credits reduce the amount of tax owed. • If no tax is owed, or if the credit is greater than the tax owed, the excess credit is not refunded to the taxpayer. • Non-refundable credits appear on lines 47 through 53 of Form 1040.

  3. REFUNDABLE CREDITS • Refundable credits also reduce the amount of tax owed. • But if the credits are greater than the tax, the excess is refunded to the taxpayer. • Refundable credits appear in the payment section of the 1040 along with tax withheld (lines 63-71).

  4. FOREIGN TAX CREDIT • A taxpayer can often take a nonrefundable credit on US taxes for taxes paid to a foreign country on income from that country. • This credit is usually out of scope for us, except for preparers with international certification. • However, if foreign taxes appear on a 1099-INT or 1099-DIV, we can take care of them. Enter the amount on line 46 of the 1040.

  5. CREDIT FOR CHILD AND DEPENDENT CARE EXPENSES • This is a nonrefundable credit that allows taxpayers to reduce their taxes by a percentage of their expenses for child and dependent care. • It may be claimed by taxpayers who, in order to work, look for work, or attend school full-time, pay someone to care for their qualifying: • Dependent child under the age of 13; • Spouse or dependent who is unable to care for him/herself.

  6. CHILD AND DEPENDENT CARE EXPENSES cont’d. • The taxpayer (both, if filing jointly) must have earned income or be full-time student(s). • The credit is a max. 35% of up to $3,000 of a taxpayer's work-related expenses for one child ($6,000 for two or more). • Any dependent-care benefits received from an employer (see W-2, box 10) must be subtracted from the $3,000. • Only the custodial parent may claim this credit .

  7. CHILD AND DEPENDENT CARE EXPENSES cont’d. • A married person filing separately may not take this credit. • Credit cannot be taken for amounts paid to a dependent, the other parent of the child, or a child of the taxpayer who is under 19. • The taxpayer must provide the name, address and SSN or EIN of the care provider. • Information for this credit is entered on form 2441. • A taxpayer who received dependent care benefits from an employer must complete Form 2441even if no payments were made for such care.

  8. RETIREMENT SAVINGS CONTRIBUTION CREDIT • A nonrefundable credit for contributions to a retirement plan. • For an employer-sponsored plan, the information appears on the W-2. • For an IRA noted on the intake form, enter the taxpayer’s information on the IRA worksheet. • Either form will prompt you to complete Form 8880. The calculations are done by TaxWise.

  9. CHILD TAX CREDIT • The child tax credit is a nonrefundable credit of up to $1,000 per qualifying child. • Those whose tax liability is small (or zero) will not receive all (or any) of the child tax credit because there is little (or no) tax to reduce. • However, such taxpayers may be able to take the additional child tax credit (which is refundable).

  10. ELIGIBILITY • To claim the child tax credit, the taxpayer must have at least one qualifying child, who: • Can be claimed as a dependent; • Is under 17 at the end of the tax year; • Did not provide over half of his/her own support; • Lived with the taxpayer for more than 6 months of the tax year; • Is a US citizen, US national, or US resident. • (Note: for divorced, etc. parents, the CTC can be claimed by the non-custodial parent if the custodial parent has released the dependency exemption to the other parent.)

  11. FIGURING CHILD TAX CREDIT • It is based on the taxpayer’s tax liability, modified adjusted gross income (MAGI), and filing status. • The amount of the credit may be reduced if the taxpayer's: • Tax liability minus the other nonrefundable credits is less than the maximum child tax credit, or • MAGI is above the limits for the taxpayer’s filing status.

  12. ADDITIONAL CHILD TAX CREDIT • Some taxpayers who do not get the full $1,000 of the child tax credit may qualify for the additional child tax credit, which is refundable. • The credit is generally based on the lesser of: • 15% of the taxpayer's taxable earned income that is more than $3,000, or • The amount of unused child tax credit (caused when tax liability is less than allowed credit)

  13. Entering the information • TaxWise will generate the necessary forms when data about dependent children shows they qualify. • If more information is needed to complete the forms, the system will prompt the preparer to do this. • TaxWise calculates both credits.

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