Tax credits reduce the amount of money dollar-for-dollar that a taxpayer owes. Some popular ones include the Saver’s Tax Credit, the Earned Income Credit, the American Opportunity Tax Credit, and the child tax credit.
For many taxpayers, claiming a tax credit means we get a refund from taxes we have all ready paid throughout the year. However, some households do not owe income tax for any number of reasons. They are also eligible to claim certain tax credits and get a refund. If you fall into this category, you may be wondering whether or not you can claim the tax credit and receive money from the government.
This is where it is important to know the difference between refundable and non-refundable tax credits.
Refundable vs. Non Refundable Tax Credits
Non-Refundable Tax Credits: Most tax credits are non-refundable. This means that the amount of the credit you are eligible for can take your tax liability down to zero, but cannot be used to receive a refund beyond. Common non-refundable tax credits include:
Refundable Tax Credits: A refundable tax credit means that if the credit exceeds the amount of your tax liability then you would receive the rest of the credit back as a refund. In other words, if you owed no income tax but were eligible for a refundable tax credit, you would receive a check (or direct deposit) from the IRS. Common refundable tax credits include:
If you qualify for a refundable tax credit, it’s a good idea to file your taxes even if you fall below the minimum income to file, since you will get a refund.
To see how the refundable and nonrefundable tax credits impact your tax refund, you can use the tax calculator.
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