The details of refundable and non-refundable tax credits can be confusing. But the difference between the two matters; they can have a direct on how much you owe or receive as a refund at tax time.

Tax Deductions vs Tax Credits:

Tax deductions reduce taxable income, lowering the amount subject to taxation. They include expenses like mortgage interest or charitable contributions. For example, if you have a $100 deduction, and you are in the 10% tax bracket, the deduction will save you $10.

Tax credits, on the other hand, directly reduce the amount of taxes owed. They are a dollar-for-dollar reduction in the actual tax liability and can be more valuable. While deductions influence the taxable income, credits impact the final tax bill, making them a more impactful way to lower the overall tax burden. That same $100, if a tax credit instead of a tax deduction, could save you $100.

Non-Refundable Tax Credits:

Non-refundable tax credits can help you lower your tax bill, but they won’t give you money back if they’re more than what you owe. They’re useful for things like education or childcare costs, making your tax situation more manageable. Some non-refundable tax credits for the 2023 tax year include:

• Child and dependent care credit – allows a credit of up to 35% of qualifying childcare costs to help parents be able to work or attend school. The credit is calculated on up to $3,000 of expenses for one qualifying child, and $6,000 for two or more children.

• Electric vehicle tax credit – Purchasing a qualifying vehicle could get you up to $7,500 for a new electric vehicle, or up to $4,000 for buying a used one.

• Residential clean energy tax credit – It is commonly known as the solar credit and can get you a credit of up to 30% of the cost of installing systems that use solar energy, such as solar panels, solar water heaters, and battery storage systems.

• Energy Efficient Home Improvement Credit – Available on the purchase of energy-saving items, this credit could save you up to $3,200 in taxes. Qualifying items include windows, doors, and heat pumps.

Refundable Tax Credits:

A refundable tax credit can give you a refund if it’s more than what you owe in taxes. Unlike non-refundable credits that just reduce your tax bill to zero, refundable credits can put money back in your pocket, even if you don’t owe any taxes. They’re especially helpful for low to moderate-income taxpayers.

• Earned income credit (EITC) – This credit aims to help lower and middle-income households remain in, or re-enter, the workforce. In tax year 2023, it provides a refundable credit between $600 and $7,430 to qualifying households. The amount is based on tax filing status, household income level, and (usually) the number of qualifying children. You do not have to have children to qualify, but having children in the household often leads to a higher credit amount.

Partly Refundable Tax Credits:

Partly refundable tax credits blend features of refundable and non-refundable credits. While they lower tax liability similar to non-refundable credits, they also have a limited refundable part. If the credit exceeds owed taxes, only a portion may be refunded, with the rest non-refundable. This category offers a balanced mix of immediate relief and potential refunds, providing taxpayers with a flexible approach to tax benefits. Notable partly refundable credits include:

• Child tax credit – up to $2,000 per qualifying child, with $1,600 potentially being refundable by using the additional child tax credit.

• American Opportunity Credit (AOTC) – this credit can be up to $2,500 for qualifying expenses for the first four years of college. If your tax liability is zero, up to $1,000 can be refundable.

Non-refundable, refundable, and partly refundable tax credits can be important tools used to lower your tax liability and could potentially increase your tax refund. The credits mentioned above are just a few of the available credits and the explanation is greatly simplified. Please consult with your tax professional to determine whether you qualify to use the credits, and how they can be used to your advantage.

Have you ever needed to verify information related to your taxes and tried to call the IRS? It can be a frustrating experience. Luckily, there are official IRS documents, transcripts, you can request that provide taxpayers with a comprehensive overview of their tax-related history. But why do these transcripts matter so much?

First and foremost, IRS transcripts serve as a valuable tool for verifying and cross-referencing financial information. Whether you’re applying for a loan, undergoing a financial review, or addressing identity theft concerns, having access to your tax transcripts ensures the accuracy of your reported income and deductions.

Taxpayers can also use IRS transcripts to monitor any changes made to their tax returns after the initial filing. This level of transparency empowers individuals to stay informed about adjustments and corrections, helping to prevent potential discrepancies or misunderstandings with tax authorities.

Furthermore, in the unfortunate event of an audit, IRS transcripts become indispensable. These documents provide a detailed record of the information that the IRS has, acting as a reliable reference point to address any inquiries raised by tax authorities.

There are four main transcripts that taxpayers can request:

Tax Return Transcript: This transcript provides a summary of your originally filed tax return, including key details such as your filing status, income, and deductions.

Tax Account Transcript: Offering a more detailed view, this transcript provides information on any adjustments made after the filing of your tax return. It includes changes made by you, the IRS, or even by third parties, offering transparency in your tax history.

Record of Account Transcript: Combining the features of both the Tax Return Transcript and the Tax Account Transcript, this comprehensive document displays a complete overview of your tax account, incorporating your tax return information and any subsequent adjustments.

Wage and Income Transcript: This specific transcript provides a detailed breakdown of your reported income, including W-2s, 1099s, and other income sources. It is particularly useful for verifying the accuracy of income reported on your tax return.

In essence, IRS transcripts are not just bureaucratic paperwork; they are a lifeline for taxpayers navigating the intricate landscape of tax obligations. By recognizing the importance of these transcripts, individuals can take proactive steps to ensure financial accuracy, compliance, and peace of mind in their fiscal matters.

At Treu Accounting, we understand that the language of tax transcripts can be complex, and deciphering the information within them may pose a challenge. Our experts not only facilitate the seamless retrieval of your transcripts but also go the extra mile to ensure that you comprehend the data contained within them. We believe that knowledge is power, and by utilizing our services, you not only gain access to your tax transcripts efficiently but also gain a clearer understanding of their implications.

When it comes to taxes, several penalties can be assessed if you don’t do things as required by the IRS. One of these is the Failure-to-Pay penalty. It kicks in if you don’t pay what you owe by the original due date on your tax return. The amount of the penalty depends on how much you owe and how late you are.

In February 2022, the IRS hit a pause on sending automated reminders for overdue tax payments. These reminders are normally sent after the initial notice of taxes due. Even though you weren’t getting these reminders because of the pause, the penalties and interest kept piling up if you didn’t pay the balance in full after the initial notice.

Next year, the IRS is hitting play again on sending reminder notices for tax years 2020 and 2021. The increase in penalties and balance due might catch you by surprise, especially if this is the first notice you’ve seen in over a year.

But on December 19th, 2023, the IRS announced some good news! They’re offering penalty relief for around 4.7 million taxpayers dealing with back tax issues, specifically those who weren’t sent reminders. The IRS is waiving the Failure-to-Pay penalties for eligible taxpayers. This is a one-time deal and not everyone qualifies. To get the relief, you must meet a few conditions:

• You’re an individual, business, trust, estate, or tax-exempt organization.
• You filed forms 1040, 1120, 1041, or 990-T income tax returns.
• Your return was for tax years 2020 or 2021.
• The tax you owe is less than $100,000 (that’s the total tax on your return).
• You were in the IRS collection notice process, -or-
• You received an initial balance due notice between Feb 5, 2022, and Dec 7, 2023.

According to the IRS, you don’t have to do anything to get this relief; it’s automatic. The IRS has adjusted individual accounts, and they’ll be adjusting business accounts in late December to early January. Trusts, estates, and tax-exempt organizations are up next in late February and early March 2024.

If you’ve already paid your balance in full, and the relief leads to a refund or credit, the IRS will send you a refund or apply the credit to another outstanding balance. Refunds are scheduled to be sent from December 2023 through January 2024.

However, even though the adjustment is automatic, it wouldn’t hurt to check your account if you believe you are eligible. You can see the adjustment on the next reminder you receive, or you can view your transcript through your account at irs.gov. If you have questions on penalty relief, individuals can contact the IRS after March 31, 2024.

This relief only covers the Failure-to-Pay penalty. If you have other penalties on your account, such as failure-to-file, accuracy-related, or underpayment penalties, they’re not going away. And the interest stays put as well.

Unfortunately, all good things must come to an end. If you were enjoying the break from failure-to-pay penalties, they’re making a comeback on April 1, 2024, for accounts that still owe money by then.

This penalty relief will help millions of taxpayers catch up on the amounts they owe the IRS, but for most people it will not erase their entire balance. If you’d like help with assessing your options or want to verify that the adjustment was done correctly, contact your tax professional.