Tax credits for dummies please.....

[torinsmom]

Can someone explain a tax credit to me? I am probably replacing my HVAC soon. I have heard that there is a 30% tax credit for replacing your unit with an energy efficient one, up to $1500. I know if I OWED the IRS money, that the $1500 would be deducted from what I owed(or that is what I understood it to be) but what if you are already getting a refund? Do you get the $1500 added to your refund?

Sorry, I am a tax idiot.

Marsha

 

[Green Tea]

Yes. A credit reduces your tax bill. Whether you pay or owe at the end of the year is irrelevant. the tax owed is the tax owed. The refund/credit only relates to what was withheld during the year.

 

[torinsmom]

So, if I tend to owe around $4000, then the $1500 comes off the top and my income tax is only $2500. So if I had $5500 withheld for federal taxes, my refund would be $3000. Am I thinking about this right?

I am at the point where I can either repair or replace my HVAC unit. It is 11 years old and has a major part that needs to be replaced. I think the tax credit ends after this year, so I need to decide what to do.

Thanks for the info. I thought that was how tax credits worked.

Marsha

 

[Sorsha]

If you owe taxes, a tax credit reduces what you owe. If you owe $4000 and get a $1500 credit, now you only owe $2500.

If you are already getting a refund, and you get a tax credit you will get a bigger refund. If you are going to get a $2000 refund, and you get a $1500 credit, you will likely now get a $3500 refund. I say likely because there can be extenuating circumstances, but that's the basic idea.

For instance, anyone who bought a new home and took advantage of the new home buyer credit last year got an $8000 credit. That was an extra $8000 added to their refund OR used to reduce any taxes they would have owed.

 

[Cheshire Figment]

Basically a tax credit is treated by the IRS as a payment made to your taxes. So a credit will directly reduce the amount you owe or add to your refund.