As a hard-working member of the tax industry you are knowledgeable about a variety of tax credits in order to provide your clients with the largest refund (or least amount owed) as possible. For a majority of tax professionals this article will be a refresher but for those new to the tax industry this article aims to explain the differences between nonrefundable and refundable tax credits, how they work, and strategies for maximizing their use.
What is a Nonrefundable Tax Credit?
Nonrefundable tax credits are credits applied to an individual’s tax return in an effort to reduce or eliminate taxes owed to the IRS. The difference between refundable and nonrefundable tax credits is that nonrefundable credits can only reduce taxes owed but in no way affect the tax refund amount while refundable credits can reduce taxes owed and potentially increase a taxpayer’s refund amount. Overall tax credits result in bigger savings for your taxpayers, especially if they are lower-income.
Tax Deductions vs. Tax Credits
It’s important to not only understand but explain to your clients the difference between Tax Deductions and Tax Credits. Tax deductions reduce the amount of income subject to taxation based on the marginal rate they are subject to. Tax credits, on the other hand, reduce the amount of taxes owed by the taxpayer.
Common Nonrefundable Tax Credits:
*Below is a list of commonly claimed nonrefundable tax credits
Residential Green Energy Credit
Maximize Nonrefundable Credits
Now that we have a better understanding of nonrefundable credits let’s discuss how we can maximize these credits to give taxpayers the largest refund possible.
If the taxpayer in question qualifies for both nonrefundable and refundable tax credits, always apply the nonrefundable first in order to reduce the amount owed to as low as it will go, ideally to zero. Then apply the refundable credits to give your taxpayers the largest refund possible. Refundable credits can be applied first to a return however this will reduce the potentially higher return the taxpayer may be expecting.
Some nonrefundable credits don’t carry over from year to year. Carefully review what nonrefundable credits your client’s qualify for in order to ensure they don’t miss out on the return they are entitled to.
Your clients return to your tax business year after year because of the quality of your service, your expertise in the tax industry, and because you get them the biggest refunds possible. Knowing how to properly apply nonrefundable vs refundable credits is a vital skill for any tax professional. This article highlights the differences in nonrefundable and refundable credits as well as strategies for implementing them into a client’s return. Also included is a list of common nonrefundable tax credits for your reference. Even if this isn’t new information for you we hope that it can at least help you explain the differences to your clients should it come up this tax season.
We hope you have found this article helpful, if you would like to read similar articles then click here for all our previous blogs. If you enjoyed this article and want to be alerted whenever a new one is published on our site then fill out the form below to receive our email alerts for tax news and more!
