The IRS offers a number of refundable tax credits that can provide you with a tax refund even if you don’t pay any income tax during the year. This is because the IRS treats the amount of your credit as a tax payment on your return. In contrast, a majority of the tax credits can reduce your tax bill to zero, but will not treat the excess as a payment.
Evaluate your eligibility for a refundable tax credit. Some of the credits that can provide you with a tax refund include the earned income tax credit, the credit for adoption expenses, the child tax credit and the American opportunity credit. However, you can't assume that the entire credit will be refundable. For example, only 40 percent of the maximum American opportunity credit of $2,500 is refundable.
Calculate the amount of your refundable credit. Each tax credit imposes separate requirements that you must satisfy in order to claim it on your return. The credit amount you report can vary depending on the particular expenses that the credit covers. For example, if you are adopting a child, the amount of your adoption credit depends on your qualified adoption expenses for the year, which includes court costs, attorney fees, travel expenses and other costs that directly relate to the adoption. As a result, your credit increases as your adoption expenses increase.
Prepare relevant IRS forms. In addition to reporting the amount of the tax credit on your tax return, the IRS often requires you to prepare additional forms that you must attach to the return in order to receive the refund. For example, when claiming the American opportunity credit for school expenses, Form 8863 must accompany the return. Or if you claim the earned income credit and have a qualifying child, a Schedule EIC is necessary.
Calculate the nonrefundable portion of your tax credit. If your tax payments for the year are at least equal to the total of the tax credits you claim, it’s not necessary to evaluate the nonrefundable portion of your credit. However, if your credits exceed your tax payments, you need to ensure that only the refundable portion ends up in the payment section of your tax return. To use the American opportunity credit as an example, only 40 percent, or $1,000 of your credit is refundable. Therefore, if you owe no taxes for the year, but qualify for a $2,000 credit, your refund will be $1000.
Many of the tax credits require that your income be below certain thresholds in order to claim it, regardless of whether you satisfy all other requirements. Therefore, you should always evaluate whether a credit’s income limitation prohibits you from claiming it before focusing on the specific requirements.
- IRS: Publication 17 – Your Federal Income Tax
- IRS: Publication 970 - Tax Benefits for Education; Jan 2011
- IRS. "Earned Income Tax Credit Income Limits and Maximum Credit Amounts." Accessed Oct. 29, 2020.
- IRS. "Topic No. 602 Child and Dependent Care Credit." Accessed Oct. 29, 2020.
- IRS. "Child Tax Credit By the Numbers." Accessed Oct. 29, 2020.
- Tax Policy Center. "What Is the Adoption Tax Credit?" Accessed Oct. 29, 2020.
- IRS. "Credit for the Elderly or the Disabled at a Glance." Accessed Oct. 29, 2020.
- IRS. "Retirement Savings Contributions Credit (Saver’s Credit)." Accessed Oct. 29, 2020.
- IRS. "The Premium Tax Credit - The Basics." Accessed Oct. 29, 2020.
- IRS. "American Opportunity Tax Credit." Accessed Oct. 29, 2020.
- IRS. "Lifetime Learning Credit." Accessed Oct. 29, 2020.
- IRS. "Refund Timing for Earned Income Tax Credit and Additional Child Tax Credit Filers." Accessed Oct. 29, 2020.
- Many of the tax credits require that your income be below certain thresholds in order to claim it, regardless of whether you satisfy all other requirements. Therefore, you should always evaluate whether a credit's income limitation prohibits you from claiming it before focusing on the specific requirements.
Jeff Franco's professional writing career began in 2010. With expertise in federal taxation, law and accounting, he has published articles in various online publications. Franco holds a Master of Business Administration in accounting and a Master of Science in taxation from Fordham University. He also holds a Juris Doctor from Brooklyn Law School.