How does a tax credit work?
Tax credits are special provisions that reduce income tax liability on a dollar for dollar basis. Credits are claimed on an individual’s income tax return. In this case, Congress has created a tax credit for first time homebuyers. The maximum credit amount is $7500. Thus, if after figuring out all the income items and exemptions and making all the required additions, subtractions, deductions and other items on a tax return a person had total tax liability of $8000, a $7500 credit would wipe out all but $500 of the tax due. 2. So in the case of this new homebuyer tax credit, what happens if the purchaser is eligible for a $7500 credit but their entire income tax liability for the year is less than $7500? This new tax credit is a so called “refundable” credit. Thus, if the actual tax liability was $6000, the purchaser would receive a tax credit refund of $1500. The refundable amount is the difference between $7500 credit amount and the amount of tax liability. (The term “tax liability” r