when you file for earned income credit for federal tax return. do you pay this back? Why is it called credit
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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5 Responses to when you file for earned income credit for federal tax return. do you pay this back? Why is it called credit
No, you already paid it, you are getting back $ that you lent to the government without interest.
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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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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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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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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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