Marcus Bellini works part time, has earned income for 2024, and qualifies for an Earned Income Tax Credit computed at 1,800 dollars. After applying his standard deduction his income tax liability before any credits is 0 dollars, and he has no other credits and no additional taxes. The Earned Income Tax Credit is a refundable credit. Disregarding any tax already withheld, what amount does the Earned Income Tax Credit contribute to his outcome on the return?
- A0 dollars, because a credit cannot exceed the income tax liability it is applied against
- BA refund of 1,800 dollars, because a refundable credit is paid out even when tax liability is 0 dollars Correct
- C0 dollars now, with the 1,800 dollars carried forward to reduce next year's tax
- DA refund of 900 dollars, being one-half of the credit because liability is 0 dollars
Why A is wrong: This describes how a non-refundable credit behaves, but the Earned Income Tax Credit is refundable, so it is paid even when liability is 0 dollars; the rule stated does not apply.
Why B is correct: A refundable credit is not limited to tax liability; the full 1,800 dollars is paid as a refund even though his pre-credit tax is 0 dollars, which is the defining feature of refundability.
Why C is wrong: Carryforward applies to certain non-refundable credits such as the general business credit, not to the Earned Income Tax Credit, which is refundable in the current year and never carried forward.
Why D is wrong: There is no rule halving a refundable credit when liability is 0 dollars; the Earned Income Tax Credit is fully refundable, so the entire 1,800 dollars is paid, not 900 dollars.