Preparing for Tax Season all year 'round

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In my experience, credits are the most valuable and the most contested items on tax returns if your credits qualify when it comes to reducing your tax liability. Non-refundable credits can reduce your tax liability to zero with no refundable aspect, while refundable credits can offer a refund in most circumstances.

Here is an example of a non-refundable credit:

I owe $300 dollars in taxes. My employer has withheld no taxes from my paycheck. I qualify for a credit, under certain tests and circumstances, of $500. $300 of the credit will subtract from my $300 tax liability giving me a balance of $0. The $200 dollar excess is not refundable to me so I will lose the rest of the $500 qualifying credit.

$500 (qualified credit) - $300 (tax liability) = $200 (This becomes $0 and is lost because there is no tax liability left to take from)

Here is an example of a refundable credit:

Imagine the same scenario as above, but now the $200 balance of the excess credit will be refunded to me.

$500 (qualified credit) - $300 (tax liability) = $ 200 (This is refunded to me)

The amounts refunded can vary depending on conditions such as back taxes, liens or judgments owed to the Department of Treasury, the IRS or Child Support Delinquency. They have the right to seize or reduce your refund.

These credits can be independent of each other or joined together. It is wise to consult your tax professional with the details. Miscalculating or falsely claiming these credits can lead to very stiff fines and penalties and revocation of being able to claim these credits in the future.

Disclaimer: Examples in this article are fictitious. This article is for information purposes only. The figures and examples do not reflect actual tax deductions in the context they were used. This article should not be used or taken as tax advice. Due to yearly tax law changes, always consult your tax professional for all your tax preparation issues.