Taxes 2024: Financial Importance of Understanding Difference Between Refundable and Non-Refundable Credits
Written by
David Nadelle
Edited by
Nicholas Morine
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Whether filing taxes in the U.S. is more difficult than in other countries is up for debate. CNBC Select estimates it takes the average American 10 to 15 hours to complete their taxes.
Multiple income and portfolio streams and a variety of filing statuses and tax rates can make tax time an arduous task. Another part of the problem is figuring out what you can deduct and what you can’t, which can make a world of difference on your Form 1040. The government rewards certain spending behaviors and instead of administering programs, it offers tax breaks.
Tax credits can reduce your liability significantly through dollar-for-dollar reductions, which are split into fully refundable, partly refundable and nonrefundable credits which are sometimes capped for a taxpayer’s tax liability and sometimes adjusted year-to-year for inflation.
Refundable Tax Credits
Taxpayers receive the full value of refundable tax credits. If the credit exceeds the amount of taxes you owe, the difference is paid in a refund. The most common fully refundable tax credit is the Earned Income Tax Credit (EITC), which can be claimed even if you aren’t able to claim children on your tax return. For 2023, moderate- to low-income taxpayers may be eligible for refundable EITCs ranging from $600 to $7,430, depending on filing status, income and family size, according to the Congressional Research Service.
Nonrefundable Tax Credits
Unfortunately, most tax credits are nonrefundable and not issued as refunds. Once your tax liability has been reduced to zero, any credit left over is forfeited. But that doesn’t mean they’re not important — they can still reduce your liability down to zero. The most common nonrefundable tax credits include:
- Child and Dependent Care Credit (CDCTC).
- Credit for Other Dependents.
- Federal Adoption Credit.
- Lifetime Learning Credit.
- Residential Energy Credit.
- Retirement Contribution Savings (Savers) Credit.
Partially Refundable Tax Credits
There are some credits, like the American Opportunity Tax Credit (AOTC) for qualified education expenses, that are partially refundable. If you claim $2,000 on the AOTC, for example, you would get a 40% refund ($800), and the remaining $1,200 would be reported as a nonrefundable credit.
To qualify for the Child Tax Credit (CTC), a child must be under age 17, be related to you and have a valid Social Security number. Additionally, you must also house and financially support the child for at least half of the year. Expanded in 2021, the CTC has since reverted back to pre-pandemic amount of $2,000Â per eligible child, of which $1,600 is refundable.
Where Can I Find Out If a Tax Credit Is Refundable?
The first place you’ll find information on whether you qualify for a given tax credit, the value of that credit — and whether it is refundable or not — is the information booklet and worksheets included with your tax return. However, the IRS site and its Interactive Tax Assistant are quick resources that are both helpful and up-to-date.
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