Tax Tip of the Week: 
Are You Getting the Credits You Deserve?
April 13, 2011 | No. 38 

Tax Deductions are good….Nonrefundable Tax Credits are better….and Refundable Credits are great!

If, for example, you take a tax deduction for mortgage interest on your tax return you are simply reducing your taxable income.  This means that if your marginal tax rate is at the 25% level, you are saving $250 in taxes for every $1,000 spent on mortgage interest.

A nonrefundable credit, on the other hand, is a dollar for dollar reduction in your tax liability.
Examples of nonrefundable credits include:

Foreign Tax Credit
Education Credits
Dependent Care Expenses (Daycare)
Retirement Savings Credit
Child Tax Credit 
Residential Energy Credit
Credit for Prior Year AMT
General Business Credit

Nonrefundable credits, however, are limited to your tax liability.  For example, if you have an energy credit of $1,500 and your tax liability is only $1,000, then your credit is limited to $1,000.

Refundable Credits are those that result in Uncle Sam giving you money!  Examples of Refundable Credits include:

Making Work Pay Credit
Earned Income Credit
Additional Child Tax Credit
American Opportunity Credit (Education)
First Time Homebuyer (expired)
Fuel Tax Credit
Adoption Credit
Health Coverage Credit

I had a couple come see me this year that have five children, two of which are in college.  They also installed a new energy-efficient HVAC system.  Their gross income was around $75,000.  After taking advantage of one part of the American Opportunity Credit for college expenses, the Child Tax Credit for those children under age 17, and the Residential Energy Credit their tax liability was eliminated.  In addition, they received an $800 Making Work Pay Credit, $2,000 Additional Child Tax Credit and $1,000 refundable credit for the second part of the American Opportunity Credit.  So their refund consisted of all the federal tax they had withheld plus $3,800 in refundable credits.

If you should have any questions, please don’t hesitate to give us a call.

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.