Saturday, March 8, 2014

Why Do Some People Get More In Tax Returns Than They Pay Into It

Taxpayers receive tax refunds when taxable income is reduced.


A taxpayer receives a tax refund that exceeds the amount of tax he originally paid when tax credits reduce his taxable income. Because the Internal Revenue Service (IRS) created standard deduction limits and taxable income guidelines, generally only taxpayers in the lowest tax brackets receive tax refunds that are greater than tax paid.


Tax Credits


Earned Income Tax Credits (EITC) and Child Tax Credits (CTC) allow a taxpayer's taxable income to reduce to a negative amount below $0. Since EITC and CTC credits are refundable, these amounts increase a tax filer's tax refund. Refundable tax credits can reduce a taxpayer's liability to a negative amount thus making a refund beyond the original tax paid possible.


Gross Income


According to IRS guidelines in 2010, if a taxpayer's gross income is below $9,350 filing single or $18,700 married filing jointly and the taxpayer qualifies for EITC and CTC credits, a refund of tax above the original tax paid is possible. This assumes that the taxpayer does not have additional earned or unearned income from self-employment sources, dividends or qualifying intererst and pensions.


Deductions


In order to qualify for EITC and CTC tax refundable credits, a taxpayer's standard deductions and/or itemized deductions must reduce taxable income below the gross income limits listed above. Standard and itemized deductions are necessary to reduce taxable income below $0 making it possible to get the refundable tax credits.


Tax Bracket


Taxpayers in the lowest 10 to 15 percent tax brackets are those who are are generally able to reduce their taxable income to $0 and are eligible to receive EITC and CTC. The number of eligible children within the household also increases the refundable CTC amount.







Tags: taxable income, income below, reduce taxable, reduce taxable income, credits reduce, EITC credits, itemized deductions, negative amount, original paid, original paid possible, paid possible, receive refunds