Question

Tax Credits

• Briefly explain the difference between a refundable and a non refundable tax credit.
• Then give three examples of tax credits and state if they are non refundable, refundable or partly refundable.

Answer 1

Solution is given by taking view of US Taxation Rule.

Answer-

Non-Refundable Credits - May Reduce Personal Tax Liability to $ O but not result in a Cash Refund.

Refundable Credits - Subtracted from Income Tax Liability and may result in a Cash Refund when Credits exceeds tax liability even if No tax is Payable.

So, The Primary Difference Non-Refundable & Refundable credit is whether Cash Refund will be received in case of Credit exceeds tax liability.

EXAMPLES of TAX CREDITS-

1. Foreign Tax Credit - Non-Refundable Credit.

Credit Given on Foreign Tax Paid by Individuals.

2. Earned Income Credit - Refundable Credit.

Earned Income Credit is Primarily for Individuals and families who have low to moderate earned income to offset the burden of Social Security taxes and provide an incentive to Work.

2. American Opportunity Tax Credit - Partial Refundable that is 40% Refundable.

American Opportunity Tax Credit is given to Qualifying Individuals for taking Education.