when you file for earned income credit for federal tax return. do you pay this back? Why is it called credit
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when you file for earned income credit for federal tax return. do you pay this back? Why is it called credit
June 23rd, 2010 at 8:31 pm
No, you already paid it, you are getting back $ that you lent to the government without interest.
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June 24th, 2010 at 12:40 pm
EIC or earned income credit is a refundable tax credit for qualified taxpayers based on earned income, adjusted gross income, and the number of qualifying children. NO, you don’t pay that back.
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June 25th, 2010 at 6:32 am
No, you don’t pay it back. It’s money the feds give as incentive for low-income people to work. It’s called a credit because if you qualify for it, you get it in addition to any refund you might have coming, or even if you didn’t have anything deducted.
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June 25th, 2010 at 11:32 pm
No you do not pay the EIC back. EIC is a Earned Income Credit that is provided by the Working Families Tax Relief Act. There are two types of credits on a tax return:
Non refundable – these credits lower the tax liabilty on your tax return only.
Refundable – these credits actually increase your “payments” or “refund” depending on your tax liablity.
Jackson Hewitt Tax School
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June 26th, 2010 at 6:32 pm
There are Refundable and Non-refundable credits.
Non-refundable Credits – these lower your tax liability all the way down to zero, but not less than zero. When your tax liability reaches zero, you get back ALL your withholdings (W-2 box 2).
Refundable Credits – these add to your refund regardless of your tax liability or withholding. EIC is an example of a Refundable Credit.
Example: Your taxable income (after subtracting everything like deductions) is $5,000. Your tax liability is 10% of this amount or $500. Your withholding for the year (W-2 box 2) is $700. If you had no credits, you’d get back (refund) $200 of the $700 when you file your tax return [you withheld $700 and should have only withheld $500].
Now, let’s say you also had a non-refundable credit (Retirement Savers Credit, Foreign Tax Credit, Child Care Credit, etc.) of $1000. This credit would lower your tax liability from $500 all the way down to zero. It can’t be lowered below zero. Your refund would now be all $700 withheld. The other $500 of credit is lost.
Finally, let’s say that instead of a $1000 non-refundable credit, you had $1000 of Earned Income Credit which is one of only two refundable federal credits of which I am aware. This credit is added to your $200 refund for a total refund of $1200. Even though you only withheld $700 on your paycheck, you get $1200 back. This is yours to keep forever (unless you commited a error in determining whether you really should have taken the credit.)
Hope this helps
H&R Block Tax School
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