Refundable Tax Credits

When figuring out which tax credits you will be able to claim on your income tax return, it is important to know whether those credits are refundable or non-refundable. These terms mean something different than a non-refundable purchase in a store.

Non-refundable tax credits are those that cannot exceed your tax liability. Once you owe $0 on your federal income taxes, you cannot get any more benefit from the tax credit in that year. Refundable tax credits, on the other hand, can go beyond the taxpayer’s liability and so can result in a check from the government at tax time.

An example of a refundable tax credit is the earned income tax credit. This is aimed at low-income working families and individuals. To claim the tax credit in 2010 as an individual with no dependents, you must earn less than $13,460 a year (or $18,470 if married and filing jointly). Even if you qualify, the maximum tax credit is only $457. However, the maximum tax credit amounts and thresholds to claim them go up for parents, so that if you have 3 or more children you can claim a maximum tax credit of $5,666 with an adjusted gross income of less than $48,362 if you are married and filing jointly.

Another refundable tax credit is the Health Coverage Tax Credit (HCTC). This tax credit pays up to 80% of health insurance premiums to families and individuals, on either a monthly or yearly basis. If you are receiving Trade Adjustment Assistance benefits, or are receiving pension payments from the Pension Benefit Guaranty Corporation, you may be eligible for this tax credit.

There is also the Making Work Pay Tax Credit, which came out of the American Recovery and Reinvestment Act (ARRA) of 2009. In 2010, working individuals can claim a tax credit of $400 and working married couples can claim a tax credit of $800. If you are receiving special credit for certain government retirees, you will be obligated to subtract it from this amount. The same goes for any economic recovery payments you may be receiving from the federal government.

Don’t forget about the Additional Child Tax Credit, which is open to parents who qualified for the Child Tax Credit but could not receive the full amount because it exceeded their income tax liability. It can return to you 15% of earned income over $3,000 for that year, or the amount that you were not able to claim from the Child Tax Credit, whichever is less. The Child Tax Credit normally pays $1,000 per child.

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