Unlike deductions, tax credit tax credits reduce your tax liability by dollar for dollar directly whereas tax deductions reduce your taxable income. Some tax credits can be more valuable than others.

Refundable vs. nonrefundable tax credit
Tax credits can either be refundable or non-refundable. If the tax credit were a refundable credit, it is not limited by the amount of an individual’s tax liability. When the tax credit is greater than the taxpayer’s tax liability, the taxpayer can get refunded the difference. It can be considered the same as a payment. The earned income credit is one of examples of refundable tax credits.
Most tax credits are nonrefundable. They are limited by the taxpayer’s ordinary income tax liability or AMT liability. Generally when a nonrefundable credit is more than the tax liability, you don’t get the entire credit amount. The unused amount of the credit is lost. However, a few tax credits have carryover provisions, such as the foreign tax credit. If the credit is limited by the tax liability for a given year, the unused part can be carried back to a previous tax year, or carried forward to a later tax year. There are time limits for the carryover.

Some tax credits, however, are partially refundable. . For example, the American Opportunity Credit is a partially refundable tax credit used to offset undergraduate college costs. Parents of dependent students or students not claimed as dependents may qualify. Up to 40 percent of the $2,500 credit is refundable. The child tax credit (CTC) is refundable only if their value exceeds a taxpayer’s tax liability. Some taxpayers may be able to claim the additional child tax credit, which allows some of the CTC to become a refundable credit to the extent that the taxpayer’s earnings exceed a specified threshold.

Stacking Order for Tax Credits
If you are eligible for multiple tax credits, there are ordering rules for which credit to take first. The ordering rules change the order in which tax credits are applied against tax liability, and how they may be used to offset both the regular tax and the AMT. The order is important when all nonrefundable credits have to be used in a given year or be lost. The order will affect the ultimate tax.
In general, all nonrefundable credits reduce regular income tax before any refundable credits are applied. Nonrefundable credits that may be carried to a subsequent year are applied after personal credits that do not have a carryover provision. However, this order is often stipulated by tax law, and encoded on tax forms, so the taxpayer must claim the nonrefundable credits in a certain order. It does not follow the order shown on the Form 1040. Following is a tentative ordering list of tax credits.

1. Foreign tax credit from 1116(line 47 on 1040)
2. Dependent care credit from 2441 (line 48 on 1040)
3. Credit for the elderly or disabled from schedule R (line 53 on 1040)
4. Credit from general business credit from 3800 and AMT credit 8801 (line 53 on 1040)
5. Lifetime learning credit and American opportunity credit (nonrefund part) from 8863 (line 49 on line 1040)
6. Retirement savings contribution credit from 8880 (line 50 on 1040)
7. Nonbusiness energy property credit from 5695, part II (line 52 on 1040)
8. Qualified electric vehicle credit from 8834 (line 53 on 1040)
9. Alternative motor vehicle credit from 8910 (line 53 on 1040)
10. Qualified plug-in electric drive motor vehicle credit from 8936 (line 53 on 1040)
11. Line 12 of line 11 worksheet for child tax credit
12. Mortgage interest credit from 8396 (line 53 on 1040)
13. Credit for qualified adoption expense from 8839 (line 53 on 1040)
14. DC Columbia first-time homebuyer credit from 8859 (line 53 on 1040)
15. Residential energy efficient property credit from 5695 part I (line 52 on 1040)

The Child Tax Credit Ordering Rules Under Publication 972
Child tax credit is not in the above ordering list. Per Publication 972, when the Child Tax Credit is claimed in conjunction with the Adoption Credit, Mortgage Interest Credit and/or DC First Time Homebuyer’s Credit, tax is first reduced by the adoption credit, mortgage interest credit and DC first-time homebuyer credit, all of which are figured using a tentative child tax credit which is computed on Worksheet 1 in Pub. 972. Then, the remaining tax is reduced by the child tax credit. The child tax credit not claimed on Form 1040, line 51 is then allowed as an Additional Child Tax Credit (Form 8812) if the taxpayer qualifies.

Follow the Tax Form and Worksheet
Before you can determine the amount of your credit, you need to know what is your tax liability is for the tax year. Sometimes you need to calculate other credits first to properly apply one credit. Because it is not necessary to reduce tax credit limit of one credit by another tax credit which is applied first, it is a best practice to the tax form and credit limit worksheet.T

Tax Planning is Key
Tax planning is the key to taking advantage of all available tax credits and deductions. If you are not sure if or how much you will be affected by the provisions of tax law, you can always contact us and will help you to figure out the best way to minimize your tax liability