Tax Return Tax Credits

A tax credit reduces your actual taxes; it decreases tax payments or increases a tax refund. In comparison, tax deductions reduce your taxable income. Tax credits help you keep bigger slices of an apple; the more tax credits you claim, the more of your hard earned money you get to keep, reduce taxes owed, or increase your tax refund. There are refundable and non-refundable tax credits; let's see what the difference is.

When you prepare and e-File your 2022 Federal and State Income Tax Returns, the Taxpert Tax App will guide you through the available tax credits. Prior to e-filing, find many tax calculator links below that will let you find out if you qualify for tax credits or not.

Refundable Versus Nonrefundable Tax Credits

With a nonrefundable tax credit, you will reduce some or all of your tax liabilities. The reduction amount is determined by your tax liability - as the result of your adjusted gross income, or AGI, and applied tax brackets calculation and not based on the final tax return result - minus your total non-refundable tax credits.

For example, if your tax liability was $3,000 in federal taxes and you qualify for a $5,000 nonrefundable tax credit, your tax liability would be zero at the time of the tax credit calculation. You will not receive the additional $2,000 ($5,000 minus $3,000 = $2,000) or the full tax credit amount - in this case, $5,000 - if you are entitled to the total nonrefundable tax credit. In the very unlikelihood that your tax liability at the time when the nonrefundable tax credits are applied were zero, you would not benefit from the tax credits at all.

One other important point is, at the time when the tax credits are applied, the taxpayer could not show a tax refund in the tax calculation process - a potential tax refund will show later. Even if your tax liability was reduced to zero due to non-refundable tax credits, you could still receive a tax refund upon completion of your tax return; for example, if refundable tax credits are still applied plus paycheck tax withholdings shown on your W-2 wage form or other Form 1099 related tax estimates. 

In summary: The vast majority of taxpayers will reduce their tax liability with non-refundable tax credits. Even if the tax liability was reduced to zero, a taxpayer could still receive a tax refund on the final 1040 IRS tax return. Thus, even if a taxpayer expects a tax refund on the 1040 Tax Form, it should not be concluded that nonrefundable does not apply or not benefit a taxpayer in this situation. We do realize this sounds all very convoluted to say the least, therefore we suggest you start and prepare a tax return on Taxpert.com and let the Taxpert.com tax app do these assessments and calculations for you so you can be certain to keep more of your hard earned money. After you have reviewed the tax return results, you can then e-File your taxes via Taxpert.com.

See below for details and examples of nonrefundable and refundable credits.

Non-refundable Tax Credits

Tax Credit
Description
Use the CAREucator to see if you qualify for this credit. This credit can offset the expenses of paying for childcare. Important for 2021: This tax credit is refundable for your 2021 Return only. See the linked page for details.
Dependents who do not qualify for the Child Tax Credit may still qualify you for the Credit for Other Dependents and earn up to $500 per qualifying person.
Lifetime Learning Tax Credit
If you do not qualify for the American Opportunity Credit, you may still be able to claim the Lifetime Learning Credit.
Elderly and Disabled Tax Credit
This credit can be used to offset your tax liability if you are 65 or older and/or disabled while meetings certain qualifications. If you are 65 or over as of 2021, you may be entitled to an additional $1,300 in standard deductions.
Saver's Tax Credit
The Saver's Credit may allow you to reduce your income tax for making contributions to a retirement plan. View the eligibility requirements on the linked page.
Foreign Tax Credit
Carryforward/Carryover
This credit is used to reduce the double tax burden for citizens earning income outside of the United States. Additional credit amount may be carried over to your next tax return.
Adoption Tax Credit
Carryforward/Carryover
Designed to help parents with the expenses related to adopting a child under the age of 18. Additional credit amount may be carried over to your next tax return. See information on claiming dependents and taxes.
Residential Energy Efficiency Tax Credit
Carryforward/Carryover
If you made energy saving improvements to your home by installing an earth-friendly energy source, you may be able to take advantage of the Residential Energy Efficient Property Credit. Additional credit amount may be carried over to your next tax return.
Electric Vehicle Credit
The Qualified Plug-In Electric Drive Motor Vehicle Credit can be worth up to $7,500 in nonrefundable credit.
Alternative Motor Vehicle Credit
The Alternative Motor Vehicle Tax Credit is for placing a qualified fuel cell vehicle in service and may only be claimed by the original purchaser of the vehicle before 2017.
The credit for paying interest on a home mortgage is claimed with your tax return and e-filed via Form 8396. This credit can only be claimed if a Mortgage Credit Certificate is used by the state or local government. This is separate from the Mortgage Interest Deduction
Credit to Holders of Tax Credit Bonds
This credit applies to holders of qualified tax credit bonds including new qualified zone academy bonds, clean renewable energy bonds, qualified energy conservation bonds, and qualified school construction bonds.
General Business Credit
This is a collection of various credits that can be claimed to promote business activities such as research, investment, and providing child care services.

 

Credit Carryforward or Carryover

A Credit Carryforward, also called a Carryover, allows you to apply a leftover amount of a previous year tax credit to a current year tax return. The Taxpert.com software will allow you to enter the carryover amount from the previous tax year. We show an example of this in the screenshot here for the Adoption Tax Credit.

Refundable Tax Credit

A refundable tax credit is a dollar-for-dollar payment to you. If you qualify for a refundable tax credit, you will receive the amount you are entitled to regardless of the dollar amount of taxes you might owe or the size of your tax refund. Let's say you owe $3,000 in federal taxes and you qualify for a $5,000 tax credit. The IRS will reduce your owed taxes to zero and pay you the remaining $2,000 ($5,000 minus $3,000 = $2,000). Or, your tax refund is $2,000 and you qualify for a $3,000 tax credit, your refund effectively would increase to $5,000. In other words, a refundable tax credit will pay you the full amount you are entitled to regardless on the amount of taxes you owe or the size of your tax refund.

The Best Known Refundable Tax Credits

Tax Credit
Description
This credit helps reduce tax liability for low-to-moderate income taxpayers. Use the EITCucator to find out if you qualify for this tax credit.
Child Tax Credit (CTC)
Helps with the many expenses of raising a child. This credit is partially refundable. Use the CHILDucator to see if you qualify for this tax credit. The Additional Child Tax Credit is the refundable part of the Child Tax Credit.
This credit can be used to offset the cost of a healthcare premium via the Healthcare Marketplace. This tax credit is typically an advance payment which is given to the payer through a year. At the end of the year, one who receives health insurance this way is required to file a tax return to figure their PTC amount.
The American Opportunity Tax Credit
Apply for this credit for help with paying for higher education for you or your qualifying dependent. This credit is partially refundable.
The Recovery Rebate Tax Credit (expired)
The refundable Recovery Rebate Credit was calculated like the 2020 and 2021 Economic Impact Payment - EIP - or stimulus payments. However, the credit eligibility and the amount was based on a taxpayer's 2020 or 2021 tax information as reported on the respective return. The stimulus checks and Recovery Rebate Credit has since expired.
The refundable Credit for Sick Leave and Family Leave for Certain Self-Employed Individuals is filed via IRS Form 7202.
Employee Retention Credit (Expired)
This tax credit was for businesses only who paid certain wages to employees due to hardship caused by COVID-19. As an employer, you may have been entitled to this credit.

This information may not apply for 2021 Returns if you qualify for the enhanced credit. The maximum Child Tax Credit amount is $2,000 per qualifying child. Up to $1,400 of the credit can be refundable for each qualifying child as the Additional Child Tax Credit. The Additional Child Tax Credit (ACTC) is a refundable credit that you may receive if your Child Tax Credit is greater than the total amount of income taxes you owe, as long as you had an earned income of at least $2,500. For 2021 Returns, the ACTC is worth up to $1,400. However, the Child Tax Credit was enhanced for 2021 Returns and most taxpayers are eligible for up to $3,600 per dependent as a fully refundable credit.

The American Opportunity tax credit (education tax credit) is a partially refundable tax credit. This tax credit allows for up to 40 percent of the credit as a tax payment if you qualify to claim this credit for education expenses. When you prepare and e-file your taxes, the Taxpert.com tax app will separately calculate the refundable and nonrefundable portion on Form 8863.

After getting your amounts for applicable credits using the calculators above, see this free and simple TAXstimator below. In the Credits portion, input the amounts and it will help accurately calculate your 2021 Return refund or taxes owed in 2022.

Start TAXstimator

Tax Credits Versus Tax Deductions

Above-the-line tax deductions reduce your taxable income. As a result, on your tax return Form 1040, you will have your adjusted gross income or AGI. In addition to above-the-line deductions, there are standardized or itemized deductions. A standardized deduction is an amount you are entitled to deduct from your AGI based on the filing status. With an itemized deduction, you list each item you qualify for as a deduction. You can only claim a standardized or itemized deduction on your tax return. Which deduction is best for you? The Taxpert.com Tax App will calculate this for you and apply the deduction method that is more advantageous for you.

In summary, tax deductions are not direct payments to you as tax credits are. For example, if your total annual income was $50,000 and you qualify for $12,550 in tax deductions, your taxable income would be reduced to $37,450. By reducing your taxable income, you would be taxed based on your filing status and personal tax bracket. In order to claim or qualify for most tax credits (except some retirement contributions) for the current tax year, the payments or expenses have to occur during the tax year or no later than December 31.

Tax Tip: When you prepare your tax return on Taxpert.com, the tax app will automatically generate the correct form(s) for you to report your tax credit or deduction based on the information you provide. The Taxpert.com tax app will suggest if you should itemize deductions or use the standardized deduction method on your tax return. We want you to keep more of your hard earned money.

Read on for details on each credit; refer to the table above to see whether or not it is refundable.

Family, Parent Tax Credits

Child Tax Credit

The Child Tax Credit is worth up to $2,000 for each qualifying child. This tax credit is meant to provide help to parents with qualifying children. The Child Tax Credit is different from the Child and Dependent Care Credit.

Use the free Taxpert.com "CHILDucator" child tax credit tax tool to find whether or not you qualify for the Child Tax Credit.

Child and Dependent Care Tax Credit

There are certain cases where you may claim a credit on family-related expenses if you are working, in school, or are in the process of looking for a job. Depending on the particulars of the situation, you may reduce your tax by claiming the Child and Dependent Care Tax Credit on your federal income tax return for any expenses related to payments made to someone to care for a child under age 13, a qualifying spouse, or a dependent.

Adoption Tax Credit

The Adoption Tax Credit is designed to help parents with the expenses involved in adopting a qualified child. An eligible child is any child under 18 or a child with special needs that lacks the ability to care for him or herself. The maximum available Adoption Tax Credit amount for Tax Year 2021 is $14,440 per qualifying child.

See tax credits for parents with dependents and children.

Credit for the Elderly and Disabled

You may be able to claim the Credit for the Elderly or the Disabled if you are 65 years of age or older, or if you retired on total and permanent disability and have taxable income. To take the credit, however, your income must not exceed certain limits.

Employee, Worker Tax Credits

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a credit for taxpayers who earn low to moderate incomes. EITC can reduce your taxes and may result in a tax refund. This means more working families and individuals may keep more of the money they earned.

Tax Tip: Use our free "EICucator" Earned Income Tax Credit tax tool to find out whether or not you qualify to claim the credit on your tax return.

Foreign Tax Credit

The Foreign Tax Credit was implemented to reduce a double tax burden for citizens earning income outside of the United States - once by the United States and again by the foreign country where the income is derived. See more information on foreign earned income and taxes.

Medical Tax Credits

Premium Tax Credit

Individual taxpayers and families may be able to claim the refundable Premium Tax Credit if they have low to moderate incomes and purchased health insurance through the Health Insurance Marketplace at HealthCare.gov. They can have the credit paid in advance to their insurance company in order to decrease their monthly premium payments or claim all of the credit on on their tax return.

Tax Credits for Education

Student Tax Credits

There are two major education tax credits available for both new and continuing students: the American Opportunity Credit and the Lifetime Learning Credit. Each credit offers special advantages to students, but both credits may not be claimed by or for the same student in the same year.

Retirement Tax Credits

Saver's Credit (Retirement Savings Contribution Credit)

The Saver's Credit, formerly known as the Retirement Savings Contributions Credit, helps middle-income families to save for retirement (especially if they contribute to a retirement plan).

For Tax Year 2021, the Saver's Credit allows taxpayers to reduce their income tax dollar-for-dollar by up to $1,000 ($2,000 for married filing jointly). The exact amount of the credit depends on their income, filing status, and the total amount of their qualified contributions.

Miscellaneous, Other Tax Credits

Tax Credits for American Citizens Living, Working Abroad

U.S. citizens and resident aliens from the United States working or living in a foreign country during the year are allowed the same tax credits as U.S. citizens and residents from the U.S. living in the United States. Check out our detailed summary on tax credits for Americans living or working abroad.

Information on Tax Breaks and Savings

  • Qualify for tax deductions.
  • Review all- year tax planning tips to save on taxes.
  • See if you qualify to claim tax deductions and credits by using the Taxpert.com free tax tools!