Question

ANSWER THE FOLLOWING QUESTION BASED OFF THE IRS WEBSITE

1A. Explain 2 nonrefundable credits

B.Explain 2 refundable credits

C. What is the difference between a non-refundable credit and a refundable credit? How are they reported on the 1040? (Hint: you will not get the points if you answer “one is refundable and the other is not”.

D. What is reported on a 1098-T

Answer 1

1 A) Two of the non refundable credits are explained below:

i) Child and Dependent Care Credit - It is non refundable tax credit offered to a tax payer who pay out of pocket expenses for child care.The credit offers relief to individual and spouses who pay for the care of a qualifying child or a disabled dependent while they work.A tax payer may be able to claim credit if he or she paid someone to care for a child under the age of 13.One can also qualify if they paid for care of other dependent individual or adult so long as that individual cannot take care of himself and lived in the tax payer's home at least half the year.The amount of credit one can claim is limited to the amount of earned income generated from work.For married couple,that limit also applies to the spouse i.e if one spouse does not earn income through employment the couple may not use the child and dependent care credit.

ii)Foreign Tax credit - The foreign tax credit is a non refundable tax credit fo rthe income taxes paid to a foreign government as a result of foreign income tax withholdings.This tax credit is available to anyone who either works in a foreign country or has investment income from a foreign source.Not all taxes paid to the foreign government can be claimed as credit against the U.S. federal income tax.A taxpayer is not eligible if he did not accrue the tax or pay the tax ,the tax was not imposed on the tax payer ,the tax is not a legal and actual foreign tax liability and the tax is not based on the income.So for an American Tax payer if any legal and actual property tax has been imposed by the U.K goverment ,the tax p[ayer willl not be able to claim this tax as a foreign tax credit as it is not an income tax .

1 B) Two of the refundable credits are explained below:

i)Earned Income Credit - This credit helps the tax payers with low incomes from work in a particular tax year.This credit reduces the tax liabilty of the tax payers and may also entitle the tax payer to a refund depending on how much credit he qualifies for.The amount of credit that any one indivdual can claim depends on the annual income earned for the tax year and the number of qualified dependents that the tax payer has.To qualify for EIC a tax payers earned income and adjusted gross income must be less than certain income limits.The maximum amount of EIC that be claimed by a single or a married tax payer depends on the number of children in the household.

ii)American Opportunity Tax Credit (AOTC) - The AOTC is a partially refundable tax credit available to help pay for higher education cost among American tax payers.It is credit for qualified education expenses for a student for the first four years of post-secondary education.The AOTC also applies to taxpayers who claim the students as dependents.The qualifying student can claim upto $2500 in expenses.It is partially refundable credit means that if student's tax liability has been reduced to zero with AOTC,they may still receive 40% of the remaining credit upto $ 1000 as tax refund. Also, a qualified student is one who must be enrolled at least part time in one academic year in an accredited post-secondary institution,must be enrolled at the institution at the beginning of the tax year,is taking courses towards a degree or some othe recognized education qualifications .

1C) A non refundable credit is a type of income that can only reduce the tax liability to zero.Any amount that remains from the credit is automatically forfeited by the tax payer.A non refundable credit can also be referred to as a wastable tax credit .The non refundable tax credit will not generate a tax refund in case the potential credit exceeds the tax owed by tax payers whereas ,

A refundable credits not only reduce the tax liability down to zero but also can take the tax liability below zero and this additional amount is refunded in cash to the tax payer. The tax payer will be refunded no matter how large or small the credit is.

So in both the cases the tax payers subtract both refundable and non refundable credits from the taxes they owe. If a refundable credit exceeds the amount of taxes owed ,the difference is paid as a refund. If a non refundable credit exceeds the amount of taxes owed,the excess is lost.

A non refundable credit and refundable credit are reported in schedule 3 of form 1040 tax return.

D)Form 1098 T will report the payments made by the students what is referred to as the qualified tution fees and related expenses and other related information such as credit or deductions students can take in a single tax year.The Form 1098-T also reports financial aid awarded to students.The eligible educational institutions use the form 1098-T to report for each students enrolled and for whom a reportable transaction is made.