Q&A: What is the difference between refundable and non-refundable tax credits?

All tax credits are either refundable or non-refundable. Refundable tax credits are refunded to the taxpayer regardless if it exceeds their tax liability. Non-refundable tax credits can only lower the tax owed; it will not be paid out beyond someone’s tax liability.

Real-life application: Person A completes their tax return and sees that they owe $1,000 of federal tax for the year. They realize they forgot about a $2,000 tax credit they are eligible for.

If the tax credit is refundable, they will receive a $1,000 ($1,000 owed – $2,000 refundable credit) refund from the IRS.

If the tax credit is non-refundable, they will owe $0 in tax, but they will not get a refund.

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