hway24:So, I'm pretty stupid when it comes to tax stuff. Can you tell me what that means, that it's refundable?
fredalina: hway24:So, I'm pretty stupid when it comes to tax stuff. Can you tell me what that means, that it's refundable? There are deductions and credits. Deductions are when you subtract something (say, mortgage paid on your house) from your "taxable income" so you pay taxes on less money. Say your income is $100,000 and your tax bracket is 35%. You would normally pay $35,000 in a year, through payroll deductions or a lump sum in April or both. But with a deduction, you can reduce your income by the deduction (you can deduct $10,000 in mortgage and student loan interest. You now only pay tax on $90,000 or $90,000 x 35% equals $31,500. Where deductions differ is that it reduces your taxes directly, not the taxable income. So with a credit of $10,000, you only pay 35% x $100,000 - $10,000 equals $25,000. To make it MORE complicated, the adoption credit used to be non-refundable. This means if your tax liability, or how much you owe for the year (even if you've had payroll deductions or not) can't go below $0. Say your income is lower and you have mortgage interest and student loan interest to deduct, you already have 4 dependents at home and get a credit for each of them, and you had some medical bills you can deduct. Your taxable income after all those credits and deductions is only $20,000, and you're taxed at 15% so you owe only $3000 for the year. You adopted and the tax credit is $13,000. You used to only be able to get $3000 back (unless you overpaid monthly but that's beside the point) because you can't pay negative taxes. The gov't let you carry the credit forward for up to 5 years. Now you can take it all in one year regardless of whether it would go negative or not.
awesome explaination. thanks much!
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