Federal Tax Refunds
The US Federal Tax code provides for several tax refunds that are potentially available to individuals who are US citizens or resident aliens (collectively referred to as Taxpayers). Tax refunds are triggered when refundable credits exceed tax liability. While most refundable credits result from the over withholding of tax during the tax year or excess estimated tax payments, some refunds are available even if no tax was paid during the year. These refunds are generally referred to negative tax.
The following three refundable credits are the most common refundable credits that may yield to negative tax:
- Additional Child Tax Credit - Available to working Taxpayers with children and depends on income level.
- Earned Income Tax Credit (EITC) - Available to working Taxpayers with low to moderate income levels.
- American Opportunity Credit - Available to Taxpayers in their first 4 years of academic education.
Additional Child Tax Credit
The Additional Child Tax Credit is available to Taxpayers with children that are claimed as dependents on the Taxpayer’s US Federal Income Tax Return. The credit is limited to $1,000 per child dependent who was under the age of 17 during the tax year. The credit is calculated as 15% of the Taxpayer’s earned income in excess of $3,000. The credit amount is first deemed as the Child Tax Credit and is used to offset any tax liability. Any excess credit after offsetting tax liability becomes the Additional Child Tax Credit and is available to the Taxpayer as a refundable credit. Note that if there is no tax liability in the first place, the entire Child Tax Credit generally becomes the Additional Child Tax Credit and is refundable. Note that there is no requirement that the Taxpayer or the dependents reside in the US.
Earned Income Tax Credit (EITC)
The EITC is available to Taxpayers who earned income within certain income limits that are dependent and the number of qualifying children claimed on the tax return. Specifically, to qualify for the EITC, Taxpayers must have earned income of at least $1 and not more than between $14,820 (for Single Taxpayers with no qualifying children) and $53,267 (for Married Taxpayers with more than 2 qualifying children) during the tax year. The maximum EITC varies from $503 for Taxpayers with no qualifying children to as much as $6,242 for Taxpayers with more than 2 qualifying children. Married Taxpayers who file a separate tax return cannot claim the EITC. The EITC cannot be claimed if the Taxpayer had annual investment income in excess of $3,400. Similarly, Taxpayers and their dependents are subject to age and residency limitation. For instance, the qualifying children must live with the Taxpayers in the US for more than half of the tax year.
American Opportunity Credit
The American Opportunity Credit is available through 2017 to Taxpayers who incurred qualified education expenses for the first 4 years of higher education. The American Opportunity Credit is comprised of 100% of the first $2,000 of qualified education expenses and 25% of any additional qualified expense for a maximum of $2,500. The refundable portion of the credit is capped at 40% of the total credit and cannot exceed $1,000. The credit is further limited if the Taxpayer’s income exceeds $80,000 (or $160,000 for married Taxpayers who file jointly). To qualify for the American Opportunity Credit, the Taxpayer or qualified dependents must be pursuing a degree and be enrolled at an eligible academic institution for at least half time in a semester during the year.