The IRS has issued a stern warning on tax credits. Credits, notably, work differently from deductions. Credits reduce the tax due on a dollar-for-dollar basis, and does not reduce your taxable income.
For example, consider an individual who got a $2,000 tax credit. If they owed $5,000 in taxes, their $2,000 credit means they will only owe $3,000.
However, if they got a $2,000 deduction, it would just bring their taxable income down. Hence, if they made $50,000, they would only be taxed on $48,000.
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Their $2,000 credit saves them $2,000. However, if they were in the 22% tax bracket, their $2,000 deduction saves them $440.
Anyone who is eligible for credits must always claim them. However, those claiming two of the most popular tax credits available have a warning from the IRS.
IRS’ warning
The IRS says that if one claims two specific tax credits, their tax refund will arrive much later than it does for other filers. These two taxes include the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit.
People who submit tax returns generally get a refund within 21 days of e-filing their taxes, according to the IRS. However, those who claim either of these credits would need to wait until at least March 2 to get their refunds.
Notably, refunds will arrive that early only if the filer chooses direct deposit, and there are no other issues with their return.
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The reason for this delayed tax refund is the PATH Act of 2015, a law that prohibits the IRS from issuing either the Earned Income Tax Credit refunds or the Additional Child Tax Credit refunds until mid-February, despite how soon one submits their return in the tax filing year.
The extra time allows the IRS to take extra steps to fight fraud. The IRS verifies an individual’s income and your eligibility for the credits that they are claiming.
“By law, we can’t issue EITC or ACTC refunds before mid-February. This includes your entire refund, not just the part that’s related to the credit you claimed on your tax return,” the IRS website says. “If you claim the EITC or ACTC, we may need more information from you about your return. If we do, we will send you a letter.”
IRS alert: Warning issued for people claiming 2 specific tax credits – what to know
