Taxpayers subtract refundable and non-refundable credits from the taxes they owe. If a refundable credit exceeds the amount of taxes due, the difference is paid as a refund. If a non-refundable credit exceeds the amount of taxes due, the franchise is lost. A non-refundable tax credit will reduce your tax liability.
This credit can reduce your tax liability to zero, but it will never result in a refund. An example of this type of credit is the credit for tuition and textbooks or any other credit taken in step 9 of the individual income tax form IA 1040. Tax credits reduce your tax liability dollar for dollar and are more valuable than tax deductions that reduce your taxable income and are tied to your marginal tax bracket. Inform students that they will have the opportunity to see how both tax credits are declared on tax forms.
The additional tax credit is for certain people who receive less than the full amount of the child tax credit. An example of this type of credit is the Iowa child and dependent care credit or any other credit included in step 10 of the IA 1040 individual income tax form. Basically, a non-refundable credit means that the credit cannot be used to increase your tax refund or to create a tax refund when you haven't yet received it. When requesting this credit for education expenses, Form 8863 separately calculates the reimbursable and non-refundable parts.
Tax credits can lower your tax bill or give you a bigger refund, but not all tax credits are created equal. A partially refundable credit, such as the American Opportunity Credit, provides up to 40 percent of the credit as a tax payment. Non-refundable credits can only reduce the tax liability to zero (so that the taxpayer does not owe any taxes). A refundable tax credit allows taxpayers to reduce their tax liability to zero and still receive a refund.
When a taxpayer's child tax credit exceeds their tax liability, they may also be eligible to apply for an additional child tax credit. Direct students to the tax tutorial on how to apply for the child tax credit and the additional child tax credit, and explain that this tax tutorial focuses on the child tax credit and the additional child tax credit. After students have completed the tax tutorial on how to apply for the child tax credit and the additional child tax credit and simulation 8 on how to apply for the child tax credit and the additional child tax credit, ask them if they have any questions about the child tax credit or the additional child tax credit. Then explain that this lesson covers the requirements for applying for the child tax credit and the additional child tax credit.