The tax season is almost the same for all tax filing individuals: looking for all the credits they can claim, showing all the expenses, making sure all things are reported correctly, and return is filed on time.
Most tax filers do not like the process, but there’s no escape from the annoying practice you have to repeat every year.
When we say tax returns and filing, the first thing that hits your mind is Form 1040. Form 1040 contains many sections, each specifying specific information about the taxpayer and his financial situation.
However, some additional forms to be attached with the tax return might be needed. Whatever the tax situation, Form 1040 has to be attached while filing for the turn.
Schedule 3 of form 1040 is related to the tax credits, a favorite part of every taxpayer. The purpose of the tax credit is to decrease the liability of the taxpayers.
If you want to be entitled to a handsome refund, you must know how to claim the credits correctly. It is impossible unless you know the right technique for listing the credits while filling your Form 1040.
This article will discuss Schedule 3, its components, and how to mention different tax credits while filling your Form 1040. So let’s get into it.
What Is Form 1040?
Form 1040 is a standard official document used by U.S taxpayers for filing their annual tax returns. The purpose of Form 1040 is to calculate the taxable income, tax liability, tax credits, and deductions, etc.
To be able to calculate the Adjusted Gross Income (AGI), you must know the total income and any allowable adjustments (above-the-line deductions).
A form 1040 is an official document used by taxpayers to report the annual income, deductions, tax liability, etc. Depending on varying tax circumstances, a taxpayer might be required to attach any additional form or document along with Form 1040. The additional documents are called Schedules.
There are several variations of Form 1040 depending on the tax situation:
- Form 1040: primary form used by the majority of taxpayers(reporting income, determining tax liability, and refund)
- Form 1040-SR: used by senior taxpayers(65 or above). It is printed with larger fonts and has charts for the determination of standard deductions for the taxpayers.
- Form 1040-NR: used by non-U.S. citizens who do not have a green card. It’s a longer version of Form 1040.
- Form 1040-X is used by taxpayers who might need to amend their tax returns after filing the first Form 1040.
Who Fills Form 1040?
As mentioned earlier, Form 1040 is an official document issued by the IRS for the tax filers to report their income, taxes, deductions, any refunds, etc.
Form 1040 has to be filed by most of the tax filers, whether employed, self-employed, or making money from investments. The general criteria for determining who will file Form 1040 are as follows:
What Is Schedule 3?
We talked about additional documents that the tax filers might need to file with their Form 1040. The additional documents are called Schedules.
Form 1040 has a total of three schedules. Each of the three schedules is related to certain tax circumstances of the tax filers. However, Schedule 3 is related to the tax credits.
Schedule 3 is a new addition to Form 1040 and was made part of Form 1040 after 2018 after revising Form 1040. The information previously shown in Form 1040 was moved off to six new schedules.
In 2018, Schedule 3 was entirely for reporting nonrefundable credits. After another additional revision in 2019, Schedule 5 was merged with Schedule 3 and contained nonrefundable credits, refundable credits & certain tax payments.
Now in 2022, Schedule 3 has two parts:
- Nonrefundable Credits
- Other Payments and Refundable Credits
We are going to talk in detail about part I of Schedule 3; therefore, it doesn’t need an explanation. However, the second part can be explained briefly.
Other Payments and Refundable Credit lists credits that are refundable. The items include net premium tax credit, the amount paid with a request for an extension to file, Credit for Federal Tax on fuel, other payments, etc.
The refundable credits work differently from nonrefundable credits. For instance, if the amount of credit is $2,000 and the total liability is $1,500, the taxpayer will receive $500 in cash from the IRS.
Since the article’s main purpose is to discuss the nonrefundable credits, we will focus on it. It’s the first part of the Schedule and lists several items discussed in this section.
Line 1: Foreign Tax Credit
A taxpayer who is paying a tax in a foreign country or U.S. possession but is also liable to pay taxes in the U.S. during the same tax year can claim a foreign tax credit on this total tax liability. However, the taxpayer will need to attach a Form 1116 with Schedule 3 and Form 1040.
Line 2: Credit for Child and Dependent Care Expenses
Child Tax Credit and Line 2 of Schedule 3 are entirely different and should not be confused. Child Tax Credit is mentioned on Form 1040.
However, Line 2 of Schedule 3 relates to expenses that are bear by a taxpayer for taking care of a child or dependent.
A taxpayer can claim the credit if both spouses filing jointly are working, looking for work, disabled, or full-time students and must be paying for childcare. A Form 2441, Child and Dependent Care Expenses, must be attached with Schedule 3 and Form 1040.
Line 3: Education Credits
A taxpayer can reclaim a part of education costs with the lifetime learning credit or American Opportunity Tax Credit.
However, the taxpayer must be a college or grad student to claim education credits. Form 8863 must be attached when claiming Education Credits in Schedule 3 of Form 1040.
Line 4: Retirements Savings Contribution Credit
A credit of up to $1,000 for separate filers and $2,000 for married filing jointly can be claimed by taxpayers.
It can be claimed if they make contributions to an eligible retirement plan, Achieving a Better Life Experience(ABLE) account, or an individual retirement plan.
The exact amount of the credit depends on tax circumstances like AGI, filing status, the amount contributed to retirement savings, etc. Besides, tax filers have to attach Form 8880 with Schedule 3 for claiming credit.
Line 5: Residential Energy Credits
When a taxpayer has opted for sustainable means of energy like solar, wind, or geothermal home improvements, they are eligible to get residential energy credits.
With the increased efficiency of your home, you can claim a credit on your total tax liability. However, don’t forget to attach Form 5695 with your schedule 3 and Form 1040.
Line 6: Other Credits
Tax filers can claim other nonrefundable tax credits when filing their tax returns. The most common credits include general business credit(Form 3800), credits carried over from past years for alternative min. tax(Form 8801), etc. However, you must report all these credits on line 6 in Part I of Schedule 3.
How Does Nonrefundable Credit Work?
As the name implies, it works in a way that any amount of the credit exceeding the taxpayer’s tax liability is nonrefundable.
For instance, if the tax liability of a person was $2,000. However, he claimed $2,500 under Child credit and dependent care expenses.
The IRS will settle his tax liability, and no cash refund will be issued to the taxpayer. Similarly, the amount of nonrefundable credit cannot be carried forward to the next tax year. It is valid only for the current tax year.
We have discussed in detail the Form 1040, Schedule 3, and tax credits in Schedule 3. The taxpayers can claim the non-refundable tax credits on their income tax returns.
However, it’s important to carefully fill the supporting documents as we have mentioned in each relevant credit mentioned in Schedule 3.