Can someone explain what a Federal Tax Credit is?

[NNN0LHI]

http://www.energystar.gov/index.cfm?c=products.pr_tax_credits

UPDATED April 24, 2009

Quick link to this page: energystar.gov/taxcredits

Federal Tax Credits for Energy Efficiency includes:
Tax Credits for Consumers
Tax credits are available at 30% of the cost, up to $1,500, in 2009 & 2010 (for existing homes only) for:
Windows and Doors
Insulation
Roofs (Metal and Asphalt)
HVAC
Water Heaters (non-solar)
Biomass Stoves



What I need to know is if receiving a Federal Tax Credit is dependent on taxes payed or owed to the IRS? Or if someone is in an income bracket where they pay little or no taxes at all do they still get the rebate back from the IRS dollar for dollar? Anyone know?

Thanks in advance.

Don

[county worker]

1. In most cases a tax credit is a dollar for dollar reduction of your tax liability.

Some credits like the earned income credit do not require any tax liability. I am not sure about the current tax credits for energy.

[quiller4]

2. Some credits are refundable others are limited to tax liability.

The Earned Income Tax Credit is refundable. A low income tax payer who qualifies can get a "refund" even if they have paid no taxes and/or have no tax liability. Most of the past energy credits have been limited to tax liability but some have carry-forward or carry-back provisions. Say that you qualified for an $1,500 energy efficiency tax credit in 2008 but only had a tax liability of $1,200. If it is a nonrefundable credit with no caryy forward or carry back provisions, you would receive only a credit of $1,200. If it was refundable you would get the full $1,500.

If it was non-refundable but had a carry-back provision, then you could file a 1040X for 2007 and apply your remaining $300 credit toward your 2007 taxes and pick up the remaining credit through a refund on past taxes paid.

If it had a carry-forward provision, you could claim the unused $300 credit on your 2009 return.

[IADEMO2004]

3. 30% of total cost credit on ground source heat pumps

we are jumping in. Initial cost sucks but watching the propane truck drive by will be a good thing

[notesdev]

4. It allows you to deduct 30% of what you paid

So you take 30% of the purchase price off your gross wages when you do your taxes.

[YewNork]

5. Tax credit versus tax deduction

Generally speaking a "tax credit" is an amount that you can subtract from the amount of tax on your income.

For example, (and I'm not using real tax rates here)

Suppose your income was $30,000 and the income tax was $2,500.
If you had a $1,000 "tax credit", you would be able to subtract it from the $2,500 and only pay $1,500 in income tax.

Tax credits can be further divided into non-refundable tax credits and refundable tax credits.

When a tax credit is "non-refundable" it means that if the credit is larger than the tax on your income, you can only
use the credit to reduce your taxes due to $0 .
Example: Tax is $3,000 and a non-refundable tax credit is $5,000, will reduce your tax to $0, but you don't get
the difference in a refund.

When a tax credit is "refundable" it means that if the credit is larger than the tax on your income, the difference
is refunded back to you.
Example: Tax is $3,000 and a refundable tax credit is $5,000, will reduce your tax to $0, and the remaining
$2,000 is sent to you as a tax refund.

The difference between a tax credit and a tax deduction is that a tax credit is subtracted from your taxes that are due.
A tax deduction is subtracted from your income before the tax on the income is calculated.