Filing your tax returns can be a hectic process. There is a lot of paperwork to fill out and a lot of documentation needed.
This is why most people often rely on the services of accountants or online tools to help them with their tax returns. These days there is no shortage of options.
In your tax filing work you may have come across the term “non refundable Tax Credit,” and you wonder what is a non refundable tax credit?
Below you’ll find out what exactly this term means and how you can use it to reduce the amount of taxes that you owe. So let’s dive into it.
What Is A Non Refundable Tax Credit?
A non refundable tax credit is a type of tax credit that can reduce the taxpayer’s liability to zero. It is also known by another name called wastable tax credit.
This type of tax credit can automatically reduce any remaining amount of tax credits by the taxpayer. In other words, a non refundable tax credit is a type of income tax break which subtracts a person’s taxable income on a dollar-by-dollar basis.
Application of Non Refundable Tax Credits
A non refundable tax credit cannot be used to increase a taxpayer’s tax refund. Nor can it be used to create a tax refund in situations when you do not have any refunds available.
Note that your savings gained with non refundable tax credits cannot be more than the amount of tax that you owe.
For instance, let us say that you owe a $400 debt to the government, and you are eligible for a Child and Dependent Care Credit worth $500.
In cases like these, you can only reduce your taxable amount by $400, because it is the amount that you owe, and otherwise you would be making profit.
Types of Tax Credits
There are three types of tax credits.
Namely, they are:
- Refundable tax credits
- Non refundable tax credits, and,
- Partial tax credits.
How do refundable tax credits differ from non refundable tax credits?
For refundable tax credits, assume that you are again eligible for a Child and Dependent Care Credit worth $500. However, you owe $400 in taxes.
Then the remaining $100 is treated as a refund entitled to you. If you want to reduce your credit potential using both refundable and non refundable tax credits, then here is how you do it.
How to Reduce Your Credit Potential
First, reduce your owed taxes using non refundable tax credits. The non refundable tax credits must always come first.
After that, use your refundable tax credits to further reduce the taxes you owe. If you are lucky, your owed taxes may fall below zero.
That means that the government now owes you. And from then on, you will receive a refund check for the amount below zero.
However, if you used the refundable tax credits before the non refundable one, then you will only reduce your owed taxes to zero and nothing else more.
As we have previously mentioned, taxes can get hectic. It can be overwhelming and confusing. We hope that this article has helped break things down into simpler terms and concepts for you.