What does this mean regarding my taxes?

Question

H&R Block told me this. I'm a student and I'm not familiar with doing taxes.

Because your tax liability is less than the amount of your Education Credit, the amount of your credit is limited from $1354 to $841.

p.s. I filed an extension already for personal reasons.

I think what I don't understand is the term "credit" is this a good thing? Please someone explain it to me. Thank you!

Answer 1

Let's go word for word.

Because your tax liability... (tax liability is the tax you owe the IRS for all the income you made during the year)

is less than the amount of your Education Credit... (credit here is something that lowers your tax liability. a credit is a good thing. it means you owe less tax)

the amount of your credit is limited from $1354 to $841 (your credit should have knocked down your tax by $1,354. However, your tax was only $841. Since you can't have a negative tax liability, it goes all the way down to zero and the rest of the credit is wasted. $841 - $1,354 = $0 in the eyes of the IRS)

Translation, your tax liability is as low as it can get...$0.

All the money you paid to the IRS (withheld, if you will) via your employer which is shown in box 2 of your W-2s will come back to you when you file your tax return.

FYI: if you are getting money back from the IRS, you do not have to file an extension

Answer 2

Go to the link below and you will find a copy of IRS form 1040. Line 46 on the second page is the total tax liability which in your example must have been $841. Lines 47 thru 55 are non-refundable credits that reduce your tax. Line 50 is for Education Credits. If your ED credit could have been $1354 you would only be able to use $841 because that is the amount that reduces your tax liability to zero. Since all of the credits on Lines 47 to 55 are non-refundable, any amount that you don't use are lost (with one possible exception for child tax credit).
http://www.irs.gov/pub/irs-pdf/f1040.pdf?portlet=3

Answer 3

There are two types of credits. Refundable credits and non-refundable credits. Non-refundable credit cannot provide a refund, but are only used to eliminate tax liability to the maximum of zero tax liability. Refundable credits can create a refund (thus the name).

Non-refundable credits are directly underneath the total tax line at the top of page 2 of Form 1040, and this is where the education credits are placed, thus the education credits (Hope or Lifetime) are categorized as non-refundable credits. Refundable credits are down at the bottom of page 2 of Form 1040, next to the withholding and estimate payment fields.

Your education credit would have been able to eliminate up to $1,354 of tax liability, but since your tax liability was only $841, the non-refundable credit was limited to the amount of the tax liability.

Answer 4

A credit reduces your income tax due. An example---your federal income tax figures out to $ 1,333.00. You have an education credit of $ 800.00; that will reduce your tax due to $ 533.00. Next postulate this; if your tax due is only $ 800.00 and you have a credit of more than that amount; say $ 1000.00; then $ 200.00 of the credit just evaporates and cannot be used as there is nothing to use it against. The education credit is non refundable and can only be used to reduce your tax due. Any excess credit goes "poof" and vanishes into the void. The "Child Tax Credit" is different in that in some cases it reduces tax due and the excess is carried down to the withholding section and can be refunded; but don't go there yet. Taxes are the reason why so many tax preparers become heavy drinkers!!!

Answer 5

A credit is a Dollar for Dollar reduction of your actual Tax Liability a Deduction just reduces your income to be taxed for example.

A deduction would effect you like this

Taxable income 10,0000 Tax @ 15% 1500
Add. Deduction 1,000 Tax reducection 150


So a 1000 dollar deduction would only reduce your taxes paid by 150 at the 15% rate and a 1000 Credit will actually reduce it by 1000 dollars.

The answer to your first question is that because your taxes owed were less than the amount of the credit the government will only let you pay NO taxes.

Answer 6

Congress has allowed two different kinds of credits:

--refundable credits
--non-refundable credits

The non-refundable credits are only good for the left-over taxes that you owe after your family deductions. If you end up owing $841 in taxes, that's the most you can ever take in credits, and the rest is lost forever and ever, amen.

Refundable credits are different. You get the full amount regardless of what you owe, and you can even get a tax refund for the year if you never paid in a dime.

Refundable credits include:
--additional child tax credit
--earned income credit
--the new phone credit

Non-refundable credits include:
--child and dependant care
--foreign tax credit
--Hope credit (for college)
--Lifetime credit (for college)
--savers credit

...and a few others...

Answer 7

The education credit is not refundable. Although your credit calculated out to $1,354, your total tax liability is only $841 so that is the maximum amount of your credit. Basically it wiped out your tax liability completely.

Answer 8

A credit is an amount that subtracts dollar for dollar from your taxes - so it's definitly a good thing.

A non-refundable credit (most of them are this type, including education credits) means that the credit can reduce your taxes to zero, but if there's some left over, you don't get it back.

So yes, the education credit reduces your taxes to zero, but you don't get the difference in cash. With your taxes reduced to zero, though, if you had anything withheld for federal income tax, since you now don't owe anything, you'd get it all back.