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The list of refundable and non-refundable tax credits: the maximum the IRS can return to you

Close to 70% of US taxpayers have received a refund from the IRS taking advantage of various credits available. Here’s a look at the two different types.

Refundable and non-refundable tax credits worth thousands

The deadline for the 2023 tax season is fast approaching. 2022 tax returns must be submitted by Tuesday 18 April 2023. However, if you need more time you can file for a six-month extension but you must apply for it by Tax Day to avoid penalties.

The IRS has already received over 101 million tax returns, nearly all of which have been processed. According to the agency more than 69 million refunds have been sent as of 7 April with an average payment of $2,878. One reason that the IRS sends refunds is simply because the taxpayer paid too much in taxes.

However, refunds can also be generated or increased when taxpayers take advantage of tax credits available to them. These are broken down into two types, refundable and non-refundable.

What are the differences between refundable or non-refundable credits?

A tax credit is essentially a reduction and/or a rebate for taxes paid to the IRS. Tax credits, as mentioned, in general can be split into two types: refundable and non-refundable.

A fully refundable tax credit is available to eligible claimants no matter how much tax they have paid. Other refundable credits may have conditions set as to when you are eligible to start claiming the credit and limit the amount that can be claimed depending on how much tax you have paid.

A non-refundable tax credit on the other hand is capped at the amount of tax that the claimant has paid; if you only pay $1,000 in income tax then you would be unable to receive more than $1,000 in the form of a non-refundable tax credit. While these won’t necessarily make your refund bigger, they can reduce the amount of taxes that you owe down to zero.

It should be mentioned as well that some credits have both a refundable and non-refundable portion.

Over a million US taxpayers leave tax refunds unclaimed

It’s important when preparing your tax return to look into all the available tax credits that you may be able to claim. The credits will reduce the amount of taxes you owe dollar for dollar, and if they are refundable, any amount in excess of what you owed will get added onto your tax refund. Every year families leave thousands of dollars on the table that they could’ve claimed.

If a taxpayer wasn’t required file a tax return, and didn’t fail to pay taxes that were owed, they should know that they have three years to claim a refund, if they failed to claim all the money that they had coming to them. This year, filers who meet those conditions can still claim a refund for the 2019 fiscal year. The IRS says that almost 1.5 million Americans still haven’t claimed the refund that is due to them.

They will have until 17 July 2023 to submit a tax return for that year to claim. The agency states that the median refund was $839 for that year.

Refundable and non-refundable tax credits

The IRS provides a list of tax credits and deductions that taxpayers should consider when filing their tax returns. Here we’ll look at some that could put thousands of dollars into your pocket, or at least greatly reduce your tax burden.

Earned Income Tax Credit (EITC):

The EITC is a refundable credit and targeted at low to moderate income households. If you have three or more children and meet the eligibilty requirements, you can receive a maximum amount of $6,728 in 2022.

Child Tax Credit (CTC):

The CTC is a valuable credit to families with children. Eligibility depends on the age of the child and household income with phase-in and phase-out conditions. For the 2022 fiscal year, the credit is worth a total of $2,000 split between a refundable $1,500 and a $500 non-refundable portion.

This is a big drop from the greatly expanded 2021 CTC which was made fully refundable and raised the age limit for children to be claimed. Depending on the age households could claim up to either $3,000 or $3,600.

American Opportunity Tax Credit (AOTC):

The AOTC is another hybrid situation; where one part is refunded and other isn’t. For the 2022 fiscal year, taxpayers can claim up to $2,500 per student. 100% of the first $2,000 spent on qualified education expenses can be claimed for each student. Then 25% of the second $2,000 in expenses. $1,000 of the credit is refundable.

Health insurance Premium Tax Credit (PTC):

In some cases the PTC is refundable credit in some situations. As in the case when a taxpayer purchased insurance through the Health Insurance Marketplace and was eligible for assistance for the cost of insurance premiums from the IRS but did not receive it. If during the year, the government didn’t pay out any eligible assistance to the insurance company then the taxpayer may be able to receive a refundable credit for it.

Credit for Child and Dependent Care expenses:

The Child and Dependent Care Credit is usually non-refundable. The credit was changed for the 2021 fiscal year, boosting it up to $8,000 and made fully refundable. In 2022, the credit reverted back to a maximum of $6,000 that taxpayers could claim in expenses they incurred to have a loved one looked after while they went to work, or even were out seeking employment. Depending on the taxpayers income, they can claim a credit for a certain percentage of those expenses.