Refundable v. non-refundable tax credits
The main difference between refundable and non-refundable tax credits is how they affect your tax liability and potential tax refund.
A non-refundable tax credit reduces the amount of tax you owe but cannot result in a refund that is greater than the amount of taxes you paid throughout the year. In other words, if you have a non-refundable tax credit that reduces your tax liability to zero, any additional credit amount cannot be refunded to you. For example, if you owe $2,000 in taxes but have a $1,000 non-refundable tax credit, your tax liability will be reduced to $1,000, but you will not receive a refund for the remaining $1,000 credit amount.
On the other hand, a refundable tax credit not only reduces the amount of tax you owe but can also result in a refund that is greater than the amount of taxes you paid throughout the year. If you have a refundable tax credit that exceeds your tax liability, you can receive the excess amount as a refund. For example, if you owe $2,000 in taxes but have a $3,000 refundable tax credit, your tax liability will be reduced to zero, and you will receive a refund for the remaining $1,000 credit amount.
Some common examples of non-refundable tax credits include the Child Tax Credit and the Lifetime Learning Credit, while examples of refundable tax credits include the Earned Income Tax Credit and the Additional Child Tax Credit.
It's important to note that the rules and requirements for tax credits can vary depending on your specific situation, so it's best to consult with a tax professional to understand how tax credits may apply to your individual tax situation.
