The point of a tax refund is for the government to return some of the money that you have overpaid. When you receive a tax refund, it means that you have paid more money than you actually owe. One of the most common reasons that you receive a tax refund is due to the fact that extra money has been withheld from your paycheck. Additionally, deductions and credits can also lower your tax liability and result in a situation in which you are entitled to a refund.
However, what happens if you don’t have to have money withheld from your paycheck? Can you still get a tax refund if you are considered exempt?
What Qualifies You as Exempt?
When you fill out your W-4 from your employer, you add in your exemptions. Normally, there is a standard deduction ($5,090 for single, $11,900 married filing jointly, in 2012), and a personal deduction ($3,800 for 2012). If your income is less than your standard deduction minus your personal deductions (you take one for each dependent, including yourself and your spouse), then you are exempt – you don’t have to pay taxes.
However, if you have any tax liability at all in the previous year, you can’t be considered exempt for the current year, and your employer will automatically take taxes out of your paycheck. Those who are exempt, though, won’t have taxes taken from their paychecks. And, normally, since you didn’t pay taxes, you aren’t eligible for a tax refund. But there are conditions that can result in being able to receive a tax refund, even if you are exempt from paying taxes.
Refundable Tax Credits
Even if you are exempt, you can still receive a tax refund if you qualify for a refundable tax credit. Some tax credits are only applied up to the point that you zero out your tax liability. Refundable tax credits, on the other hand, can result in cash back. These are tax credits that can create negative tax liability, resulting in a refund, even if you haven’t paid taxes.
One of the most common refundable tax credits is the Earning Income Tax Credit. This is a tax credit you receive for working and earning low to moderate income. If you have earned any income at all, even if you are exempt, you can claim this credit if you qualify. And, it can result in receiving a tax refund – even if you didn’t have taxes withheld from your paycheck.
Another popular credit is the American Opportunity Credit. This education credit is available to help offset certain costs of higher education. The maximum amount of the credit is $2,500. However, this credit is only partially refundable. Only 40% of it ($1,000) will be paid out to you if you don’t owe taxes.
Before you think that you won’t get any back from the government, double check your eligibility for refundable tax credits. There are instances where even being exempt from paying taxes can still result in a tax refund, but you won’t get your money unless you file a tax return.