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What is Refundable Credit?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 13 September 2016
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A refundable credit is a type of tax credit that is paid even if the tax liability of the individual is nil. This characteristic helps to differentiate the refundable credit from other forms of tax credits that may be used to reduce that liability to zero. While all tax credits help to reduce tax liability, they do not necessarily result in a refund if the liability is reduced to zero, while the refundable credit is much more likely to result in some type of refund. Credits of this type are normally associated with federal or national tax returns, but may also be issued by state and local tax agencies.

The range of refundable credit options will vary from one country to the next. One that is provided by tax laws in a number of countries is the earned income credit. This credit is often applied to anyone who generates an annual income under a certain amount. The application of this credit takes place even if the filer has no tax liability for the period at all, providing the refundable credit is claimed on a properly filed tax return.

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Another example of a refundable credit is the child tax credit. Many countries provide tax credits for each child residing full time in a household, with those credits provided regardless of the amount of tax liability accrued for the period under consideration. Some nations also offer a refundable credit for children that were adopted during the current tax period; this credit is sometimes referred to as an additional child tax credit, or simply as an adoption credit. As with the earned income credit, the taxpayer must claim this type of refundable credit in order to actually receive it.

Because tax laws vary a great deal from one jurisdiction to another, it is important to understand how these types of credits are applied and what types of refundable credits are available. It is also helpful to look beyond the name of the credit, since different countries may use similar names but attach different meanings and requirements to those credits. For this reason, taking the time to become fully acquainted with the nature of any tax credits that may be claimed within certain circumstances is crucial if the taxpayer is to take advantage of the credits offered within a given nation. When taxpayers feel unable to manage this process alone, securing the services of a professional tax consultant will make the process of identifying and claiming appropriate refundable credit tax deductions much easier.

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