Nonrefundable, Refundable Tax Credits 

Refundable or
Tax Credit?

A tax credit reduces the income taxes a taxpayer owes; it's a dollar for dollar income tax amount reduction. Non-refundable tax credits reduce income taxes owed only while refundable tax credits might not only reduce the income taxes owed, but also increase the tax refund. This would be the case if the tax credit amount is larger than the income taxes owed. In comparison, if a non-refundable tax credit is larger than the amount of taxes owed, it would not result in a tax refund increase.

There are refundable and non-refundable tax credits; let's see what the difference is.

Tax Credit Type Comparison

With a nonrefundable tax credit, you will reduce some or all of your tax liabilities. The reduction amount is determined by your tax liability - as the result of your adjusted gross income or AGI and applied tax brackets - minus your total non-refundable tax credits.

On the other hand, a refundable tax credit is a dollar amount that can be fully refunded back to you. For example, if you are a low-to-moderate income earner, you will likely benefit from the Earned Income Tax Credit or EITC. This tax credit is fully refundable and can be part of your tax refund when you file. Calculate your EITC here before you eFileIT.

One other important point is that at the time when the tax credits are applied, the taxpayer could not show a tax refund in the tax calculation process - a potential tax refund will show later. Even if your tax liability was reduced to zero due to non-refundable tax credits, you could still receive a tax refund upon completion of your tax return; for example, if refundable tax credits are still applied plus paycheck tax withholdings shown on your W-2 wage form or other Form 1099 related tax estimates.

In summary: The vast majority of taxpayers will reduce their tax liability with non-refundable tax credits. Even if the tax liability was reduced to zero, a taxpayer could still receive a tax refund on the final 1040 IRS tax return. Thus, even if a taxpayer expects a tax refund on the 1040 Tax Form, it should not be concluded that nonrefundable does not apply or not benefit a taxpayer in this situation.

With refundable tax credits, you can receive an IRS tax refund
if the tax credit is larger than the amount of tax you owe.

We do realize this sounds all very convoluted to say the least; we suggest you start and prepare a tax return on Let the Tax App do these assessments and calculations for you so you can be certain to keep more of your hard-earned money. After you have reviewed the tax return results, you can then e-file your taxes via your account so you do not need to worry about mailing anything. See how the eFile platform works before you start for free.

See below for details and examples of nonrefundable and refundable credits.

Non-refundable Tax Credits

Nonrefundable credits are good up to the amount of your tax liability. If you owe taxes, you can use tax credits to offset the amount you owe until it is reduced to $0. For example, if your tax liability was $3,000 in federal taxes and you qualify for a $5,000 nonrefundable tax credit, your tax liability would be zero at the time of the tax credit calculation. You will not receive the additional $2,000 ($5,000 minus $3,000 = $2,000) or the full tax credit amount - in this case, $5,000 - if you are entitled to the total nonrefundable tax credit. In the event that your tax liability at the time when the nonrefundable tax credits are applied is zero, you would not benefit from the tax credits at all.

Below is a table of nonrefundable tax credits with helpful links and calculators. eFile will calculate these for you when you file your return online through your eFile account.

Tax Credit
This credit can offset the expenses of paying for childcare; use the CAREucator tax tool to see if you qualify for it. Note: This tax credit was refundable for your 2021 Return only, it is nonrefundable for all other years - details are on the linked page.
Dependents who do not qualify for the Child Tax Credit may still qualify you for the Credit for Other Dependents which could earn you up to $500 per qualifying person. See how to claim a dependent on a tax return.
There are tax credits for students! If you do not qualify for the American Opportunity Credit, you may still be able to claim the Lifetime Learning Credit worth up to $2,000. See also: student tax deductions.
This credit can be used to offset your tax liability if you are 65 or older and/or disabled while meetings certain qualifications. If you are 65 or over as of the end of the year, you may be entitled to an additional sum in standard deductions - eFile will calculate this all for you and include the Elderly and Disabled Credit if you qualify on Schedule R and include it with your Form 1040 or 1040-SR.
Get paid and rewarded for saving for retirement! The Saver's Credit may allow you to reduce your income tax for making contributions to a retirement plan. View the eligibility requirements on the linked page and see if you may be eligible for a credit of up to $2,000.
Foreign Tax Credit
This credit is used to reduce the double tax burden for citizens earning income outside of the United States. Additional credit amount may be carried over to your next tax return.
Adoption Tax Credit
This credit is designed to help parents with the expenses related to adopting a child under the age of 18. Additional credit amount may be carried over to your next tax return. See information on claiming dependents and taxes; your adopted child may qualify you for other tax savings.
Residential Clean Energy Tax Credit
Formally the Residential Energy Efficiency Tax Credit
If you made energy saving improvements to your home by installing an earth-friendly energy source, you may be able to take advantage of the Residential Energy Efficient Property Credit or Residential Clean Energy Credit. Additional credit amount may be carried over to your next tax return.
The Clean Vehicle Credit - formally the Qualified Plug-In Electric Drive Motor Vehicle Credit - can be worth up to $7,500 in nonrefundable credit. Review the linked page for a list of qualifying vehicles. See also: tax credit for purchasing a hybrid.
The Alternative Motor Vehicle Tax Credit is for placing a qualified fuel cell vehicle in service and may only be claimed by the original purchaser of the vehicle.
The credit for paying interest on a home mortgage is claimed with your tax return and e-filed via Form 8396. This credit can only be claimed if a Mortgage Credit Certificate is used by the state or local government. This is separate from the Mortgage Interest Deduction.
Credit to Holders of Tax Credit Bonds
This credit applies to holders of qualified tax credit bonds including new qualified zone academy bonds, clean renewable energy bonds, qualified energy conservation bonds, and qualified school construction bonds.
General Business Credit
This is a collection of various credits that can be claimed to promote business activities such as research, investment, and providing childcare services.

Credit Carryforward or Carryover

A credit carryforward, also called a carryover, allows you to apply a leftover amount of a previous year tax credit to a current year tax return. The software will allow you to enter the carryover amount from the previous tax year.

Refundable Tax Credit

A refundable tax credit is a dollar-for-dollar payment to you. If you qualify for a refundable tax credit, you will receive the amount you are entitled to regardless of the dollar amount of taxes you might owe or the size of your tax refund. Let's say you owe $3,000 in federal taxes and you qualify for a $5,000 tax credit. The IRS will reduce your owed taxes to zero and pay you the remaining $2,000 ($5,000 minus $3,000 = $2,000). Or, your tax refund is $2,000 and you qualify for a $3,000 tax credit, your refund effectively would increase to $5,000. In other words, a refundable tax credit will pay you the full amount you are entitled to regardless on the amount of taxes you owe or the size of your tax refund - eFile will help claim all the tax credits you qualify for.

The Best-Known Refundable Tax Credits

The table below summarizes some of the most common and beneficial tax credits. Included are links to more information and calculators for the credits.

Tax Credit
This credit helps reduce tax liability for low-to-moderate income taxpayers. Use the free EITC calculator or EITCucator to find out if you qualify for this tax credit.
The CTC helps with the many expenses of raising a child; this credit is partially refundable. Use the CTC calculator or CHILDucator to see if you qualify for this tax credit. The Additional Child Tax Credit is the refundable part of the Child Tax Credit. Note: The CTC was fully refundable in 2021 only; you cannot claim the advance Child Tax Credit payments on any other return.
This credit can be used to offset the cost of a healthcare premium via the Healthcare Marketplace. This tax credit is typically an advance payment which is given to the payer throughout the year. At the end of the year, one who receives health insurance this way is required to file a tax return to figure their PTC amount.
Claim a tax credit for going to college; apply for this credit for help with paying for higher education for you or your qualifying dependent. This credit is partially refundable and can be worth up to $2,500.
As a homeowner or resident, claim a credit for installing an alternative fuel property your home, including a charger for your electric vehicle or other green property.
The refundable Recovery Rebate Credit is calculated like the 2020 and 2021 Economic Impact Payments - EIP - or stimulus payments. The RRC is only claimed on 2020 and 2021 Taxes. Compare all stimulus check payments and how they relate to your tax returns.
The refundable Credit for Sick Leave and Family Leave for Certain Self-Employed Individuals is filed via IRS Form 7202. You can file back taxes to claim this credit.
This tax credit is for businesses only who paid certain wages to employees due to hardship caused by COVID-19. As an employer, you may be entitled to this credit for 2020 and/or 2021

After getting your amounts for applicable credits using the calculators above, see this free and simple TAXstimator below. In the Credits portion, input the amounts and it will help accurately calculate your next tax return refund or taxes owed.

Start TAXstimator

Make IT Less Taxing: IT is Income Taxes and the eFile Tax App requires only simple entries to do all the complicated tax credit, deduction, and bracket calculations for you on both the federal and state levels. Start for free and see how simple filing your own taxes can be.