Qualify for a tax refund - ATG AdvisorsQualify for a tax refund - ATG Advisors

Qualify for a tax refund


January 23, 2017


How would I Qualify for a Tax Refund?

From the beginning of January to the mid April,
taxpaying Americans are engaged in the processing of filing their individual tax returns. For many, they are looking forward to a larger refund, while some are hoping not to pay too much this year. But overall everyone is hoping their returns were correctly filed to avoid future IRS problem. These concerns can be daunting and with all the various tax office’s ads on television one can easily become overwhelmed. However, I have found there are two easy ways to answer the age old question of how do I qualify for a tax refund? To qualify for a tax refund first one must have had to either over paid their taxes or qualify for refundable tax credit.

Over-payment of Tax Refunds

An “over-payment” occurs when you pay more taxes during the year than what you owe. This can either be refunded to you or applied to other taxes. Receiving a refund based on an over-payment is pretty straight forward, you get returned the portion of your taxes paid that exceeded your tax debt.

Ex. John is single with no children and works at Wal-Mart. Since John is a W-2 employee Wal-Mart will deduct Federal, Social Security and Medicaid taxes each pay period from John’s check. Now at the end of the year, John’s W-2 shows he earned a total of $27,317.43 and he paid $2,973.14 in federal taxes.

Adjusted gross income:                     $27,317.43

Deduction for exemptions:               $ 4,000.00

Standard or itemized deduction:      -$ 6,300.00

Taxable income:                         $17,017.43

Total Federal Tax due                      $   2,091.00

Total Federal Taxes Withheld:          $2,793.14

Total Refund Due:                         $702.14

You qualify for a refundable tax credits

A tax credit reduces your tax liability dollar-for-dollar. This means that a $100 tax credit actually takes $100 off your tax balance due.

Most Popular Types of Refundable Tax Credits     

Earned Income Credit (EIC) is a refundable tax credit for low- to moderate-income working individuals and couples, particularly those with children. EIC is for certain people who work and have earned income under $53,505.

Can I Claim the EIC?

To claim the EIC, you must meet certain rules.

Table 1. Earned Income Credit in a Nutshell

First, you must meet all the rules in this column.Second, you must meet all the rules in one of these columns, whichever applies.Third, you must meet the rule in this column.
Chapter 1.
Rules for Everyone
Chapter 2.
Rules If You Have a Qualifying Child
Chapter 3.
Rules If You Do Not Have a Qualifying Child
Chapter 4.
Figuring and Claiming the EIC
1. Your adjusted gross income (AGI) must be less than:

• $47,955 ($53,505 for married filing jointly) if you have three or more qualifying children,

• $44,648 ($50,198 for married filing jointly) if you have two qualifying children,

• $39,296 ($44,846 for married filing jointly) if you have one qualifying child, or

• $14,880 ($20,430 for married filing jointly) if you do not have a qualifying child.

2. You must have a valid social security number by the due date of your 2016 return (including extensions).

3. Your filing status cannot be Married filing separately.

4. You must be a U.S. citizen or resident alien all year.

5. You cannot file Form 2555 or Form 2555-EZ (relating to foreign earned income).

6. Your investment income must be $3,400 or less.

7. You must have earned income.

8. Your child must meet the relationship, age, residency, and joint return tests.

9. Your qualifying child cannot be used by more than one person to claim the EIC.

10. You cannot be a qualifying child of another person.

11. You must be at least age 25 but under age 65.

12. You cannot be the dependent of another person.

13. You cannot be a qualifying child of another person.

14. You must have lived in the United States more than half of the year.

15. Your earned income must be less than:

• $47,955 ($53,505 for married filing jointly) if you have three or more qualifying children,

• $44,648 ($50,198 for married filing jointly) if you have two qualifying children,

• $39,296 ($44,846 for married filing jointly) if you have one qualifying child, or

• $14,880 ($20,430 for married filing jointly) if you do not have a qualifying child.

IRS Publication 596 – Introductory Material

American Opportunity Tax Credit (AOTC) is a refundable tax credit for individual completing their first 4 years of college; pretty much you are allowed a maximum annual credit of $2,500 for each of your 4 years of undergrad or other recognized education credential. The amount of the credit is 100 percent of the first $2,000 of qualified education expenses you paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses you paid for that student. But, if the credit pays your tax down to zero, you can have 40 percent of the remaining amount of the credit (up to $1,000) refunded to you.

Who is an eligible student for AOTC?

To be eligible for AOTC, the student must:

  • Be pursuing a degree or other recognized education credential
  • Be enrolled at least half time for at least one academic period*beginning in the tax year
  • Not have finished the first four years of higher education at the beginning of the tax year
  • Not have claimed the AOTC or the former Hope credit for more than four tax years
  • Not have a felony drug conviction at the end of the tax year

 

Claiming the credit

Just like the AOTC Form 1098-T Tuition Statement is generally received from the student’s school by January 31. This statement helps you figure your credit. The form will have an amount in either box 1 or 2 to show the amounts received or billed during the year.


Ex. John is enrolled at the local State University and his annual tuition and books expense amount to $6,500. John is working on his first degree and has attended school all year, and since John has no felony drug convictions, and has not claimed AOTC or Hope Credit 4 times of more he will qualify for the American Opportunity Credit.

 

Credit Calculation

Tuition                     4500
100% of 1st 2000                      100%X2000 = 2000
40% of Remainder                      40%X2500 = 1000
Max credit allowed per year:                        $2500.00

Max refundable portion:                    $1000.00

Crazy, right!?

What are the income limits for AOTC?

  • To claim the full credit your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly).
  • You receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly).
  • You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers).

 

Claiming the AOTC credit

Generally, students receive a Form 1098-T, Tuition Statement, from their school by January 31. This statement helps you figure your credit. The form will have an amount in either box 1 or 2 to show the amounts received or billed during the year. But, this amount may not be the amount you can claim. See qualified education expenses for more information on what amount to claim.

 

Life Time Learning Credit (LLC) is a refundable tax credit for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can help pay for undergraduate, graduate and professional degree courses–including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit. It is worth up to $2,000 per tax return.

The Lifetime Learning Credit is for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can help pay for undergraduate, graduate and professional degree courses–including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit. It is worth up to $2,000 per tax return.

 Who can claim the LLC?

To claim a LLC, you must meet all three of the following:

  1. You, your dependent or a third party pay qualified education expenses for higher education
  2. You, your dependent or a third party pay the education expenses for an eligible student enrolled at an eligible educational institution
  3. The eligible student is yourself, your spouse or a dependent you listed on your tax return

 

Claiming the LLC credit

Generally, students receive a Form 1098-T, Tuition Statement, from their school by January 31. This statement helps you figure your credit. The form will have an amount in either box 1 or 2 to show the amounts received or billed during the year. But, this amount may not be the amount you can claim. See qualified education expenses for more information on what amount to claim.

 

What is the LLC worth?

The amount of the credit is 20 percent of the first $10,000 of qualified education expenses or a maximum of $2,000 per return. The LLC is not refundable. So, you can use the credit to pay any tax you owe but you won’t receive any of the credit back as a refund.

 

Conclusion

Tax refunds are a privilege and not a right. We are only entitled to ultimately to our over-payment and refunds of refundable tax credit programs. I know it is sometimes frustrating when you see your friends and families getting huge refunds and you are not, so I hope the information above helps you understand a little better how to qualify for a tax refund.

 

*Keep checking for our next blog on “How to Reduce my Taxable Income?”

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