Question

What are tax credits?

Your adjustments, deductions, and exemptions reduce your taxable income. Tax credits, on the other hand, are directly applied to the tax that you pay. You may take tax credits regardless of whether you itemize deductions. Many credits are limited, based on income levels, so the amount of a credit may be reduced for high-income taxpayers.
The following statement refers to refundable or nonrefundable tax credits. A tax credit that reduces your income tax liability to below zero with the excess being returned to you is___________ .

Answer 1

Answer: Refundable Tax Credit

Step-by-step explanation:

When a tax credit is able to reduce your tax liability to below zero and then the remainder is returned to you, that is a Refundable Tax Credit. For Instance, if you get a Refundable tax credit from the IRS of $300 and your Tax Liability is $250 then not only do you not have to pay the liability but the IRS will give you $50 which is the remainder after the tax credit reduced the liability to $0.

If you have $0 in Liability, you can still apply for a Refundable Tax Credit which means that you will be paid the whole thing.

Some people therefore first calculate their taxes and then remove the deductions and apply for Non-refundable tax credits and then when their liability is at the lowest, they apply for a Refundable Tax Credit which then means that they can stand a chance to get something from the IRS.