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CREDITS: DEPENDENT CARE, CTC, ETC NON-REFUNDABLE CREDITS § Non-refundable credits reduce the amount of tax owed. § If no tax is owed, or if the credit is greater than the tax owed, the excess credit is not refunded to the taxpayer. § Non-refundable credits appear on lines 47 through 53 of Form 1040. REFUNDABLE CREDITS Refundable credits also reduce the amount of tax owed. But if the credits are greater than the tax, the excess is refunded to the taxpayer. Refundable credits appear in the payment section of the 1040 along with tax withheld (lines 63-71). FOREIGN TAX CREDIT A taxpayer can often take a nonrefundable credit on US taxes for taxes paid to a foreign country on income from that country. This credit is usually out of scope for us, except for preparers with international certification. However, if foreign taxes appear on a 1099-INT or 1099-DIV, we can take care of them. Enter the amount on line 46 of the 1040. CREDIT FOR CHILD AND DEPENDENT CARE EXPENSES This is a nonrefundable credit that allows taxpayers to reduce their taxes by a percentage of their expenses for child and dependent care. It may be claimed by taxpayers who, in order to work, look for work, or attend school full-time, pay someone to care for their qualifying: Dependent child under the age of 13; Spouse or dependent who is unable to care for him/herself. CHILD AND DEPENDENT CARE EXPENSES cont’d. The taxpayer (both, if filing jointly) must have earned income or be full-time student(s). q The credit is a max. 35% of up to $3,000 of a taxpayer's work-related expenses for one child ($6,000 for two or more). Any dependent-care benefits received from an employer (see W-2, box 10) must be subtracted from the $3,000. Only the custodial parent may claim this credit . CHILD AND DEPENDENT CARE EXPENSES cont’d. A married person filing separately may not take this credit. q Credit cannot be taken for amounts paid to a dependent, the other parent of the child, or a child of the taxpayer who is under 19. q The taxpayer must provide the name, address and SSN or EIN of the care provider. q Information for this credit is entered on form 2441. A taxpayer who received dependent care benefits from an employer must complete Form 2441even if no payments were made for such care. RETIREMENT SAVINGS CONTRIBUTION CREDIT q A nonrefundable credit for contributions to a retirement plan. q For an employer-sponsored plan, the information appears on the W-2. q For an IRA noted on the intake form, enter the taxpayer’s information on the IRA worksheet. q Either form will prompt you to complete Form 8880. The calculations are done by TaxWise. CHILD TAX CREDIT The child tax credit is a nonrefundable credit of up to $1,000 per qualifying child. Those whose tax liability is small (or zero) will not receive all (or any) of the child tax credit because there is little (or no) tax to reduce. However, such taxpayers may be able to take the additional child tax credit (which is refundable). ELIGIBILITY To claim the child tax credit, the taxpayer must have at least one qualifying child, who: Can be claimed as a dependent; Is under 17 at the end of the tax year; Did not provide over half of his/her own support; Lived with the taxpayer for more than 6 months of the tax year; Is a US citizen, US national, or US resident. (Note: for divorced, etc. parents, the CTC can be claimed by the non-custodial parent if the custodial parent has released the dependency exemption to the other parent.) FIGURING CHILD TAX CREDIT It is based on the taxpayer’s tax liability, modified adjusted gross income (MAGI), and filing status. The amount of the credit may be reduced if the taxpayer's: Tax liability minus the other nonrefundable credits is less than the maximum child tax credit, or MAGI is above the limits for the taxpayer’s filing status. ADDITIONAL CHILD TAX CREDIT Some taxpayers who do not get the full $1,000 of the child tax credit may qualify for the additional child tax credit, which is refundable. The credit is generally based on the lesser of: 15% of the taxpayer's taxable earned income that is more than $3,000, or The amount of unused child tax credit (caused when tax liability is less than allowed credit) Entering the information TaxWise will generate the necessary forms when data about dependent children shows they qualify. If more information is needed to complete the forms, the system will prompt the preparer to do this. TaxWise calculates both credits.
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