Tax Refunds and Credits

A refundable tax credit is a credit that can be paid to you, even if you have no income tax payable. To obtain a refundable tax credit, you must meet the eligibility criteria, and must claim the credit on your income tax return.

Taxes… Say that word and many people will start to groan when they hear it …and with good reason. To begin with, paying annual taxes is usually a financial burden for most people. Each time you review your paycheck, you might feel cheated or abused, considering the federal income tax withholding amounts (let’s not even mention state taxes or Social Security or Medicare taxes).

There is a way to combat the tax-time doldrums. It may help to keep in mind that tax regulations include a lot of tax deductions for which you could be entitled. These tax deductions give you the benefit of not reporting specific economic benefits. Or they may allow you to deduct certain income expenditures or even directly from the cost of your tax bill.

Refundable tax credits have become increasingly popular over the past two decades, as a series of tax breaks have allowed more households to eliminate their income-tax liability altogether. President Bill Clinton’s welfare overhaul relied on expanding the earned-income tax credit, which is for low-income working individuals and families and is designed to provide an incentive to work. President George W. Bush’s 2001 tax cuts increased an existing child tax credit, and made it refundable so households that didn’t pay taxes could receive it.

Why dont clean energy companies take advantage of tax credits directly?

Non-refundable tax credits can reduce a company’s tax liability to zero — but not below. (Negative tax liability essentially means you get a check from the U.S. Treasury.) So solar and wind startups, many of which take years to become profitable, may not have enough taxable income to take full advantage of credits.

A refundable tax credit can reduce your total tax to a negative number, which means the government pays you. For example suppose your total tax before the tax credit is $1,500, a $2,000 refundable tax credit means you not only get back everything you paid through tax withholding, but you also get an extra $500 back from the government. Your total federal income tax for the year is negative. A non-refundable tax credit can reduce your tax to zero but your tax can’t go below zero. For example suppose your total tax before the tax credit is $1,500, a $2,000 non-refundable tax credit means you will get back everything you paid through tax withholding and that’s it. Your actual benefit from this non-refundable tax credit is $1,500, not $2,000. If you pay enough taxes, it doesn’t matter whether a tax credit is refundable or non-refundable. Otherwise, a $100 refundable tax credit is better than a $100 non-refundable tax credit.

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