What are refundable tax credits?

The tax credits reduce the amount owed to the IRS. Claiming any tax credit on your federal income tax return will cut your tax liability. This surely fantastic but what’s even better is that some of them can even contribute to your tax return.

This is basically like the government is basically giving you a discount on how much you owe, plus giving you money. If you had very little tax liability, you could get away with taking a refundable credit and wait for the government to pay you.

Stimulus Payments

The refundable portion of any credit will be given to you when you get your tax refund. The 2021 stimulus payments will be paid this way. If you qualify for the 2021 stimulus check which will have the same requirements as the first stimulus payment for coronavirus, it will be added to your refund if you have no tax liability.

Common Refundable Tax Credits

The most commonly claimed tax credits are the child tax credit and the earned income tax credit.

While the earned income tax credit doesn’t have a set amount, the child tax credit has. The child tax credit 2021 has a value of $2,000 and as much as $1,400 of it is refundable. The refundable portion of earned income tax credit is up to 96 percent.

Since tax credits directly reduce the amount owed to the IRS, they are more valuable than tax deductions whereas a deduction can only reduce the taxable income.

To find out about the tax credits you’re eligible to take, you can visit our tax credits page or consult a tax professional. You can also take advantage of the notable e-file providers which may help you figure out which tax credits you’re eligible to take on your federal income tax return.

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