Why is a tax credit better than a tax deduction?
All taxpayers know that a tax credit minimizes their tax bill significantly. For instance, if a taxpayer owns let’s say $1,500 in federal income taxes and the same taxpayer gets a $1,000 tax credit, his/her tax bill will be only $500.
However, when it comes to refundable tax credits, it might feel like Lady Luck is on our side. A tax credit does wonders, but a refundable tax credit can also turn your tax bill into a tax refund (on top of that).
Hypothetically speaking, let’s think about the following situation: If a taxpayer owed $1,000 in terms of taxes but also had a $1,200 refundable tax credit, he or she would get a tax refund check of $200 from the IRS.
Now, that everything is clear because you’re actually receiving what amounts to a refundable tax credit in the form of a stimulus payment right now, meaning that you’re not waiting to put your hands on the money from the credit this year when you file your tax return for 2020, you’re getting what the IRS called—an advanced refundable tax credit.