Refundable vs. Non-Refundable Tax Credits

Apr 1, 2019 | Newsletter

Refundable vs. Non-Refundable Tax Credits

Tax credits can reduce your tax bill or give you a bigger refund, but not all tax credits are created equal. While most tax credits are refundable, some credits are nonrefundable, but before we take a look at the difference between refundable and nonrefundable tax credits, it’s important to understand the difference between a tax credit and a tax deduction.

Tax credits reduce your tax liability dollar for dollar and are more valuable than tax deductions that reduce your taxable income and tied to your marginal tax bracket. Let’s look at the difference between a tax credit of $1,000 and a tax deduction of $1,000 for a taxpayer whose income places them in the 22% tax bracket:

    • A tax credit worth $1,000 reduces the amount of tax owed by $1,000–the same dollar amount.

 

  • A tax deduction worth the same amount ($1,000) only saves you $330, however (0.22 x $1,000 = $220). As you can see, tax credits save you more money than tax deductions.

Tax Credits: Refundable vs. Nonrefundable

A refundable tax credit not only reduces the federal tax you owe but also could result in a refund if it more than you owe. Let’s say you are eligible to take a $1,000 Child Tax Credit but only owe $200 in taxes. The additional amount ($800) is treated as a refund to which you are entitled.

A nonrefundable tax credit, on the other hand, means you get a refund only up to the amount you owe. For example, if you are eligible to take an American Opportunity Tax Credit worth $1,000 and the amount of tax owed is only $800, you can only reduce your taxable amount by $800–not the full $1,000.

Refundable Tax Credits

  • The Earned Income Tax Credit
  • The Child and Dependent Care Credit
  • The Saver’s Credit

Nonrefundable Tax Credits

Examples of nonrefundable tax credits include:

  • Adoption Tax Credit
  • Foreign Tax Credit
  • Mortgage Interest Tax Credit
  • Residential Energy Property Credit
  • Credit for the Elderly or the Disabled
  • Child Tax Credit (tax years prior to 2018)

Partially Refundable Tax Credits

Some tax credits are only partially refundable such as:

  • Child Tax Credit (starting in 2018)
  • American Opportunity Tax Credit

Questions about tax credits or deductions?

If you have any questions or would like more information about either of these tax topics, please call.

New Tax Rules Could Impact Your 2025 Planning

New Tax Rules Could Impact Your 2025 Planning

Top Highlights Under The New Law The One Big Beautiful Bill Act of 2025 (OBBBA) was signed into law on the July 4th holiday. This sweeping legislation locks in several tax cuts from the 2017 TCJA and introduces a host of new provisions designed to benefit both...

The Tax Impact of Business Bartering

The Tax Impact of Business Bartering

Bartering is simply the exchange of services or property, and it’s a taxable event. For example, if a computer consultant trades services with an advertising agency, each must report income equal to the fair market value of the services they received, typically the...

Reasons and Rules for Filing an Amended Return

Reasons and Rules for Filing an Amended Return

Once a tax return is filed, most people breathe a little easier. But it’s not uncommon to realize too late that something was left off a return, figures were misreported or some other error was made. Accuracy is essential, but, depending on the type of error, an...

Closing a Business? Here’s How to Stay on Top of Your Tax Duties

Closing a Business? Here’s How to Stay on Top of Your Tax Duties

Businesses close for various reasons. Perhaps you’re ready to embark on a welcome change such as retirement or launching a new venture. Or maybe it just no longer makes financial sense to continue operating your current business. Whatever the reason, closing your...