Basically, You enter all your income. Then get to subtract the Standard Deduction or your Itemized Deductions to arrive at the Taxable Income. The tax is calculated.
The credit can reduce the tax, but only to zero. If the credit is more than the tax you don't get the excess back.
THEN the withholding is subtracted from any tax you still owe so if the credit reduced your tax to zero you would get back all the withholding.
Just saw your last post. You will report the full gross IRA withdrawal (before taxes and penalty taken out) as income. Here's my note on that.
You don't actually pay the tax or 10% penalty (you pay a 10% early withdrawal penalty if you are under 59 ½). You had taxes withheld like from your paycheck. You still have to enter the whole gross original amount (before taxes were withheld) with your other income to figure out the total tax (and it may put you into a higher tax bracket) and then the withholding is subtracted from the total tax to figure your refund or tax due. The gross amount shows up,on 1040 line 4a and the taxable amount on 4b. The withholding will show up on 1040 line 16.
It has to break out and show the 10% penalty separately on your return, (Schedule 4 line 59 which goes to 1040 line 14)
Then you get credit for all the withholding taken out on 1040 line 16.
