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The Impact of Refundable and Non-Refundable Tax Credits

Tax Credits are a hot topic in Missouri, in part because they make up so much of the state’s budget. In Fiscal Year 2012, for instance, Missouri projected total expenditures of $8.64 billion. According to the Tax Credit Review Commission, more than $629 of those expenditures were projected to be consumed by tax credits. (Source)

When an individual or business receives a tax credit, that individual or business receives a dollar-for-dollar reduction in its taxes due at the end of the year. Tax credits are the equivalent of subtracting an exact number of dollars from taxes due to the state. In other words, a $100 tax credit applied to a $1000 tax bill would result in $900 due to the state.

Tax credits and tax deductions are not the same things, although many people confuse the two. Tax deductions aren’t a reduction in the taxes an individual or company owes. Instead, they’re a reduction in the total taxable income an individual or business has to report.

Learn More: What Exactly Is a Tax Credit?

Refundable vs. Non-Refundable Tax Credits
There are two big categories of tax credits: refundable tax credits and non-refundable tax credits. When an individual or business receives a non-refundable tax credit, the credit cannot reduce the amount of taxes due to less than $0.

For example, if you own $500 in taxes and receive a $600 non-refundable tax credit, your balance due will be $0.

Refundable tax credits can be profitable for the recipient. When the amount of a refundable tax credit exceeds the amount of money an individual or business owes on state taxes, the individual or business gets a tax refund.

For example, if you owe $500 in taxes and receive a $600 refundable tax credit, you will receive a $100 refund from the state. Or, as TurboTax puts it, “For refundable tax credits, if you would otherwise owe less than $1,800, you get the difference back as a refund!” (Source)

Missouri Works goes into more detail by explaining that unused credits can even be bought and sold:

“Tax credits can only be applied to tax liability for the year in which they were earned. Any annual unused balance is fully refundable. The credits may also be transferred, sold or assigned.” (Source)

Should Missouri Offer Refundable Tax Credits?
Providing incentive to companies to do business in Missouri is a good thing, but should the state—which still hasn’t met its responsibility to the Foundation Formula for public education—provide tax credits that can be transferred, sold, or assigned? And is it a good idea for Missouri to offer incentives that exceed taxable incomes to the point that individuals and businesses can profit directly from those tax credits?

Missouri Parent will continue to raise more questions about and cover more topics surrounding Missouri’s tax credits, and the way they impact public schools. To stay informed on legislative and funding issues like tax credits, bookmark the Missouri Parent Blog or follow us on Facebook or Twitter.


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