One thing I’d like to learn to do a better job of this year is to communicate more effectively with visuals. A good picture is worth 1,000 words. In some of my old posts, I wrote 1,000 words but people still keep asking the very question I attempted to address. Clearly I wasn’t effective in getting the point across with 1,000 words.
The post Refundable Tax Credit and Non-Refundable Tax Credit is one of those posts. Let me try again with some charts.
The first chart above shows a person’s withholding and tax liability before any tax credit. Because this person didn’t withhold enough, he or she will owe some taxes at the time of filing.
This second chart shows after non-refundable tax credits (red block) are applied, the taxpayer will get a small refund instead of owing taxes. The non-refundable tax credits are capped by the tax liability. The best a person can do with non-refundable tax credits is to get all the withholding back. A non-refundable tax credit can increase your tax refund after all; it’s just the refund can’t exceed your withholding.
As you might have guessed, the refundable tax credits are not capped by one’s tax liability, as shown in this third chart. The refund can exceed the withholding.
So how did I do? Are these charts clearer than what I tried to convey before in words?
Once again, here’s the table that shows if a tax credit is refundable or not.
|Additional Child Tax Credit||Yes|
|Alternative Motor Vehicle Credit||No|
|American Opportunity Credit||40% Refundable|
|Child and Dependent Care||No|
|Child Tax Credit||No|
|Earned Income Credit||Yes|
|Elderly and Disabled Credit||No|
|Excess Social Security Tax Withheld||Yes|
|Foreign Tax Credit||No|
|Health Coverage Tax Credit||Yes|
|Lifetime Learning Credit||No|
|Residential Energy Efficient Property Credit||No|
|Retirement Savings Contributions Credit (aka Saver’s Credit)||No|