Nonrefundable Tax Credits vs. Refundable Tax Credits

A nonrefundable tax credit is a credit that can reduce the amount of an individual’s tax liability to zero, but cannot exceed the total amount of income taxes owed. In other words, you would not receive a tax refund if the credit exceeds the amount of your tax liability. For example, if you have a nonrefundable tax credit of $5,000 and a tax liability of $3,000, the credit will eliminate the tax liability, that is, reduce it to zero. The remaining $2,000 of the credit, however, will be lost, because the IRS will not send you a refund for this amount.

Nonrefundable credits for tax year 2014 include the following:

• Credit for child and dependent care expenses.
• Child tax credit.
• Education credits.
• Residential energy credit.
• Foreign tax credit.
• Credit for the elderly and disabled.
• Credit for qualified alternative vehicles.
• Retirement saver’s tax credit.
• Adoption credit

A refundable tax credit, on the other hand, is not limited by the amount of an individual’s tax liability, but can go beyond that and reduce an individual’s tax liability below zero, and this will result in a tax refund. In other words, you would receive a tax refund if the credit exceeds the amount of your tax liability. For example, if you have a refundable tax credit of $5,000 and a tax liability of $3,000, the IRS would refund you the amount by which the tax credit exceeds the tax liability. You would therefore receive a tax refund of $2,000.

Refundable credits impact on your total tax liability as follows:

• They are reported in the payments section of Form 1040, and are thus treated as payments.
• They are subtracted from your total tax liability on line 63, Form 1040.
• They can reduce tax liability to zero, and result in a refund of the amount by which the credits are greater than the tax liability.

The total amount of your refundable credits is refundable to you, even if there is no tax liability, or no taxes were withheld from your income.

Refundable credits for 2014 include the following:

• Earned income credit.
• Additional child tax credit.
• American opportunity credit (40% of the amount).
• Net premium tax credit.

The primary objective of this article is to empower taxpayers to learn to do their own taxes. For more information claiming all your tax deductions and credits, grab yourself a copy of “Doing Your Own Taxes is as Easy as 1, 2, 3,” ($6.98) on

Milton G Boothe is an IRS Enrolled Agent with over twenty years of tax and financial accounting experience, including several years at PricewaterhouseCoopers. He is also a British certified Chartered Accountant. He is currently employed in private tax practices where he helps people resolve their tax problems, minimize their taxes, and routinely represents the interests of taxpayers before the Internal Revenue Service. As an Enrolled Agent (EA) Boothe is a federally-authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the IRS for audits, collections, and appeals.
Milton G Boothe is also the author of several tax publications, wherein he encourages people to empower themselves by learning to do their own taxes.

Subscribe to TaxConnections Blog

Enter your email address to subscribe to this blog and receive notifications of new posts by email.