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Claiming a tax credit reduces the amount of tax you owe and can potentially get you a bigger refund. When it’s time to do your federal income taxes, you’ll need Schedule 3 to help you claim the credits you’re eligible for.
Taxpayers first used Schedule 3 (and five other new schedules) with the new, shorter Form 1040 in 2018. Schedule 3 was aimed at helping people claim nonrefundable tax credits. For 2019 taxes, the IRS has released a draft of an updated Schedule 3 that makes significant changes to the form, including adding refundable credits and certain types of payments that can help reduce the amount of tax you owe.
Let’s look at some things you’ll need to know if you want to use the new Schedule 3 to claim both nonrefundable and refundable credits to shave some dollars off the amount of tax you owe.
What is a Schedule 3?
As far as tax forms go, Schedule 3 is a relative newcomer. It appeared in 2018 when the IRS and Treasury Department revised the 1040 and moved information off the main tax form to six new schedules. In 2018, Schedule 3 included information only on nonrefundable tax credits.
The IRS has proposed changes to Schedule 3 for 2019. A draft of the revised form incorporates refundable tax credits and certain tax payments (which were previously on Schedule 5) along with nonrefundable credits.
To claim any of the credits listed on Schedule 3 or to report certain payments that can lower the tax you owe, such as estimated tax payments, you’ll need to complete Schedule 3 and file it with your tax return. It’s important to note that some credits may require you to fill out additional forms. For example, if you’re claiming education credits, you’ll also need to complete Form 8863.
What information is on Schedule 3?
The proposed Schedule 3 has two parts: Part I, Nonrefundable Credits, and Part II, Other Payments and Refundable Credits. The nonrefundable credit section is pretty much the same as the 2018 version, with the exception of line numbers. The 2018 form kept the line numbers that each item had on the old 1040. The new version starts line numbering at 1. Though it’s possible the IRS will make additional changes to the Schedule 3, let’s use the line numbering from the draft for a line-by-line walk-through of what’s on the form.
Part I: Nonrefundable credits
This is the original section that first appeared on Schedule 3. Nonrefundable credits can lower your tax bill, but you can’t get any excess credit back as a refund.
Line 1: Foreign tax credit
If you paid tax to a foreign country or U.S. possession and are subject to U.S. tax on the same income, you may be able to take the foreign tax credit to reduce your domestic tax liability.
To claim a foreign tax credit, you may need to file Form 1116 along with Schedule 3 and your 1040 tax return. If you’re using DIY software to e-file your return, be sure to check whether it supports Form 1116. Not all do. For example, Credit Karma Tax®, which is always free, doesn’t support the form but can help you claim the foreign tax credit if you’re eligible to do so without the form.
Line 2: Credit for child and dependent care expenses
Not to be confused with the child tax credit (which appears on Form 1040), the credit for child and dependent care expenses aims to give you a tax credit for the cost of childcare or taking care of dependents. To qualify for the credit, you (and your spouse, if filing jointly) need to be working, looking for work, a full-time student or disabled and paying for childcare to allow you to work or job hunt.
To claim this tax credit, you’ll file Form 2441, Child and Dependent Care Expenses, along with Schedule 3. This form helps you calculate the amount of your tax credit.Do you qualify for the child and dependent care credit?
Line 3: Education credits
If you’re a college or grad student, you may be able to reclaim some of your education costs with either the lifetime learning credit or the American opportunity tax credit. To calculate the amount of your education tax credit for these popular offerings, you’ll fill out Form 8863.
Line 4: Retirement savings contributions credit
If you meet income requirements, you may be able to get a credit of up to $1,000 ($2,000 if married filing jointly) for making contributions to an eligible retirement plan, individual retirement arrangement or an Achieving a Better Life Experience (or ABLE) account. The amount of the credit depends on your adjusted gross income, filing status and the amount you contribute to retirement savings during the tax year. To claim this credit, you’ll also need to fill out and attach Form 8880.
Line 5: Residential energy credit
If you make certain solar, wind or geothermal home improvements to enhance the energy efficiency of your home, you may be able to qualify for a residential energy credit. To claim the credit, you’ll need to fill out and attach Form 5695 with your Schedule 3.
Line 6: Other credits
There are other less-common nonrefundable tax credits you may qualify for, like the general business credit (Form 3800) or credits carried over from past years for the alternative minimum tax (Form 8801). You’ll report those credits on this line.Learn more about the AMT
Part II: Other payments and refundable credits
New on the 2019 draft version of Schedule 3 is the addition of refundable credits and other payments. A refundable tax credit can result in a refund even if it drops your tax owed past $0. If the credit reduces the amount of tax you owe to $0, you can get the refundable portion of the credit back as a refund. For example, if your tax obligation is $1,000 and you qualify for a $2,000 refundable credit, the first $1,000 of that credit would wipe out your tax bill. You could then get the remaining $1,000 back as a refund. A nonrefundable credit for the same amount would drop your $1,000 tax obligation to zero but you’d lose out on the remaining $1,000 of the credit.
Here’s a line-by-line rundown of Part II on Schedule 3.
Line 8: 2019 estimated tax payments and amount applied from 2018 return
You may need to make estimated quarterly tax payments for any number of reasons, including if you’re self-employed, have income from interest or dividends, or expect to owe $1,000 or more in taxes when you file your return. You’ll report those on this line, along with any carryover from your 2018 tax return if you opted to have it applied to your 2019 return instead of being paid out as a refund.
Line 9: Net premium tax credit
The premium tax credit is a refundable credit that helps make healthcare insurance more affordable to Americans who purchase coverage through the health insurance marketplace. You may be able to take the credit as “advance payments” that are made directly to your insurance company each month, or you can claim it on your return. Either way, you’ll need to fill out Form 8962 and attach it to your Schedule 3 in order to claim this tax credit.
Line 10: Amount paid with request for extension to file
You can request an extension on filing your tax return if you need more time, but you’ll still need to pay any tax you owe by the tax filing deadline (typically April 15). If you got an extension and now you’re ready to file your return, Line 10 is where you’ll report any payments you’ve already made.
Line 11: Excess Social Security or Tier 1 RRTA tax withheld
It’s possible to have too much tax withheld from your paycheck. For example, if you work for a railroad company and had too much Tier 1 Railroad Retirement Tax Act taxes withheld, or you had too much Social Security tax withheld (which can happen if you had two or more employers in a year), Line 11 is where you would report this amount to reclaim the overpayment. You wouldn’t need to attach the forms to your 1040, but you could use Worksheet 3-1 or Worksheet 3-2 in Publication 505 to calculate this amount.
Line 12: Credit for federal tax on fuels
When you fill up at the pump, a federal gas tax is automatically included in your bill. But for some uses, such as gas for equipment used in farming or fuel used in commercial aviation, you may be able to claim a tax credit to recoup those federal taxes. To claim this credit, you’ll fill out and attach Form 4136.
Line 13: Other credits
Just as with Line 6 above, this last line is a catchall for less-common refundable tax credits. For example, if you’re claiming the health coverage credit, you’ll report it on this line along with a copy of Form 8885.
Though Schedule 3 isn’t a particularly long or complex document, it packs in a lot of information. If you want to claim any of the credits or other income adjustments listed on the revised Schedule 3, it’s important to find out if you qualify for those tax breaks. If you use an online tax filing service like Credit Karma Tax® to do your taxes, the service may be able to help you complete and file Schedule 3.
Relevant sources: IRS: Credits and Deductions for Individuals | IRS Schedule 3, Additional Credits and Payments (2019) | IRS News: There are six new schedules some taxpayers will file with the new Form 1040 (archival) | IRS: Foreign Tax Credit | IRS Publication 503: Child and Dependent Care Expenses (2019) | IRS: About Form 2441, Child and Dependent Care Expenses | IRS: About Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits) | IRS: Retirement Savings Contributions Credit (Saver’s Credit) | IRS Form 5695, Residential Energy Credits (2019) | IRS Form 3800, General Business Credit (2019) | IRS: About Form 8801, Credit for Prior Year Minimum Ta x- Individuals, Estates and Trusts | IRS: Estimated Taxes | IRS: The Premium Tax Credit – The Basics | IRS: Extension of Time to File Your Tax Return | IRS Tax Topic No. 608: Excess Social Security and RRTA Tax Withheld | U.S. Energy Information Administration: Frequently Asked Questions | IRS Form 4136, Credit for Federal Tax Paid on Fuels (2019) | IRS About Form 8885, Health Coverage Tax Credit
Troy Grimes is a tax product specialist with Credit Karma Tax®. He’s worked in tax, accounting and educational software development for nearly 30 years. He has a bachelor’s degree in business administration with an emphasis in business analysis from Texas A&M University. You can find him on LinkedIn.