Tax credit
tax credit has been described in two ways.First is the partial tax payment that has already been paid by tax payer for tax es due and second is the benefit that is paid to the employees by the state, through the existing tax system. Thus, tax credit can be used with respect to the tax es already paid and with respect to different types of benefits given by state. For example, in United States, tax credit arises due to withholding tax that is deducted by the employers at the time of making salaries to their employees. tax credit is also applied in dividend imputation cases.In case of partial payment, tax credit is made when tax payer has paid more tax es that applicable and thus, his tax account shows negative tax.
For example, if any person has paid excess income tax, he is eligible for tax refund towards tax credit. tax credit can be refundable or non-refundable.Some examples of refundable tax credit are child tax credit, earned income tax credit etc. In countries like United Kingdom, there are some other types of tax credits too like child tax credit, working tax credit etc. It is important to understand here that in case of non-refundable tax credit, the overall tax position of a person cannot be negative, that is, tax owed cannot be reduced below zero. Thus, in such cases, even if a person has made excess tax, he is not eligible to get the tax refund. For example, Hope and Lifetime learning are some non-refundable tax credits in United States.
Experts feel that tax credit is more beneficial as compared to tax allowance or tax deduction because tax credit decreases the payable tax directly while other two reduce the tax able income over which tax is applicable. tax credit programs are also available for Corporate tax Payers. For example, in United States, tax credits are available to all the corporate tax payers through programs like New Markets tax credit Program.
Tax credit paid by state
When tax credits are paid by state, this is done basically to encourage people for doing work. For example, in United Kingdom, working tax credit and child tax credit are paid to the concerned employee through GIRO or they are paid into their bank post office accounts directly. Working tax credit is also paid to people that are 16 years old and are disabled. Similarly, all the individuals and couples that have children are eligible to receive child tax credit in UK. One of key features of this type of tax credit is that as the number of working hours is increased, amount towards tax credit his higher.For example, if any of parent works for 16 hours or more during a week, tax credit amount is increased.In case of working tax credit, all low earners that do not have children and are more than 25 years of age are provided with tax credit benefits.
Thus, tax credit is calculated on basis of means tested ways. Above two types of tax credits are applicable in UK since April 2003. For getting any of these tax credits, it is required that a person must be more than age of 16 years and should be residing in United Kingdom. In case where a person is not living in UK, there are certain cases where he can still become eligible for tax credit.First case is when a person is a citizen of any other county included in EEA or European Economic Area and his work is in UK. Second case is when he is a crown servant who has been posted overseas. Third and last is when he is a citizen of EEA country and living abroad but receives Jobseekers Allowance based upon contributions or he receives UK state pension. All couples in UK are required to make joint tax credit claims regarding two types of tax credits mentioned above. If a person is a part of couple, he is not eligible to get the claim as a single person. As far as child tax credit is concerned, it is to be understood here that it is meant for those people who are either qualifying young person or are responsible for at least one child. Thus, this type of tax credit is a reward provided by the state for taking care of children.
Earned income tax credit
Earned income tax credit, also called as EITC or EIC is one of principal types of tax credits available. For the purpose of EITC, earned income has been defined under tax code in United States. It includes salaries, wages, commissions, tips and all other types of tax able payments made to employees.It also includes net earnings resulting from self employment, gross income earned by the statutory employee and disability payments to a small extent. EITC is one of key anti-poverty tools available in United States.It is basically a refundable tax credit and maximum amount attached with this type of tax credit changes from time to time.
For example, for the tax year 2007, maximum EITC payable to a person having one qualifying child is $2853. In case of two or more qualifying children, this amount is $4716.In case, uncles, aunts, siblings or grandparents are sharing their residence with a child for more than 50% of the tax year, they are also eligible for EITC. People or couples, who do not have children or taking care of children, are eligible to get an EITC of $428. It should be noted here that qualifying children is generally below the age of 18 years. However, if he is classified as a full time student, age relaxation up to 23 years is available.
Other countries that provide above type of tax credit include Austria, New Zealand, Ireland, Belgium, France, Denmark, Finland etc.
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