By: John S. Morlu II, CPA
Tax credits are financial tools designed to reduce the amount of income tax a taxpayer owes. These credits provide a dollar-for-dollar reduction in a taxpayer’s liability, which can significantly ease their tax burden. Understanding the distinction between refundable and non-refundable tax credits is crucial for maximizing their benefits.
Refundable vs. Non-Refundable Tax Credits
Refundable Tax Credits
Refundable tax credits offer the most flexibility for taxpayers. If the amount of a refundable credit exceeds the taxpayer’s total tax liability, the remaining balance is returned as a refund. For example, even individuals with little or no tax liability may still benefit from filing a tax return to claim these credits.
Non-Refundable Tax Credits
In contrast, non-refundable tax credits can only reduce a taxpayer’s liability to zero. If the credit amount exceeds the tax owed, the excess is forfeited. While these credits can lower taxes owed, they do not provide additional refunds.
Table of Common Tax Credits
The following table highlights whether specific credits are refundable or non-refundable:
| Tax Credit | Refundable | Non-Refundable | Details |
| Earned Income Tax Credit (EITC) | ✔️ | Aimed at low- to moderate-income workers. Refundable even for individuals with little or no tax liability. Eligibility depends on income, filing status, and number of qualifying children. | |
| Child Tax Credit (CTC) | ✔️ | Provides up to $2,000 per qualifying child under 17. Non-refundable and reduces tax liability to zero, but does not result in a refund if unused. | |
| Child and Dependent Care Tax Credit | ✔️ | Helps taxpayers who pay for childcare or dependent care expenses so they can work, study, or seek employment. The percentage of expenses covered depends on income. | |
| American Opportunity Tax Credit (AOTC) | Partially (up to $1,000 refundable) | ✔️ | Supports education expenses for the first four years of postsecondary education. A maximum credit of $2,500, with up to $1,000 refundable for eligible taxpayers. |
| Credit for Other Dependents | ✔️ | For taxpayers with dependents who don’t qualify for the Child Tax Credit, such as older children or relatives. Offers up to $500 per dependent and is non-refundable. | |
| Electric Vehicle Credit | ✔️ | Encourages the purchase of electric vehicles. Amount varies by vehicle type and manufacturer but can only reduce tax liability to zero. | |
| Health Care Premium Tax Credit | ✔️ | Assists taxpayers who purchase health insurance through the Health Insurance Marketplace. Refundable and aimed at lowering the cost of premiums for eligible individuals. | |
| Saver’s Credit (Retirement Savings Credit) | ✔️ | Provides an incentive for low- and moderate-income individuals to save for retirement. The credit amount is a percentage of the contributions to a retirement plan or IRA. | |
| Residential Energy Credit | ✔️ | Encourages energy efficiency improvements to homes. Covers expenses like solar panels, energy-efficient windows, and heating systems. Non-refundable. | |
| Lifetime Learning Credit (LLC) | ✔️ | Helps taxpayers with expenses for postsecondary education beyond the first four years. Provides a maximum credit of $2,000 per return and is non-refundable. | |
| Adoption Credit | ✔️ | Covers qualified expenses related to adoption, including adoption fees, court costs, and travel expenses. Maximum credit varies by year and is non-refundable. | |
| Additional Child Tax Credit (ACTC) | ✔️ | A refundable credit available for taxpayers who qualify for the Child Tax Credit but cannot fully use it due to insufficient tax liability. | |
| Foreign Tax Credit | ✔️ | For taxpayers who paid taxes to a foreign government on income also subject to U.S. taxes. Reduces double taxation but is non-refundable. | |
| Premium Tax Credit (PTC) | ✔️ | Refundable credit that helps eligible individuals and families with low or moderate income pay for health insurance purchased through the Health Insurance Marketplace. |
Detailed Tax Credit Overviews
Earned Income Tax Credit (EITC)
The Earned Income Tax Credit is a refundable credit aimed at low- to moderate-income taxpayers. It benefits millions annually, yet many eligible individuals fail to claim it. Qualifying groups include:
- Grandparents raising grandchildren
- Native Americans
- Veterans
- Self-employed individuals
- Workers without qualifying children
- Individuals below filing thresholds with earnings
- Non-English speakers
- Rural residents
- People receiving disability pensions or supporting children with disabilities
The IRS provides resources like Publication 596 and the EITC Assistant to help taxpayers determine their eligibility.
Child Tax Credit (CTC)
The Child Tax Credit is a non-refundable credit that reduces tax liability for qualifying taxpayers. To qualify, the child must:
- Be under 17 years old and a U.S. citizen
- Possess a Social Security number
- Be claimed as a dependent on the taxpayer’s return
Foster children and certain extended family members may also qualify if other criteria are met. Taxpayers with dependents who do not qualify for the CTC may still be eligible for the Credit for Other Dependents.
Child and Dependent Care Tax Credit
Taxpayers who incur expenses for childcare or dependent care while working, attending school, or job-hunting may qualify for the Child and Dependent Care Tax Credit. For detailed guidance, taxpayers can consult Publication 503.
American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit supports education expenses for the first four years of higher education. This credit is partially refundable, allowing eligible taxpayers to receive up to 40% of the remaining credit amount, up to $1,000, as a refund after reducing their tax liability to zero.
Key details of the AOTC include:
- A maximum credit of $2,500 per eligible student
- Coverage of 100% of the first $2,000 of qualified expenses and 25% of the next $2,000
- Income limits: $80,000 for single filers ($160,000 for joint filers), with phaseouts starting above these thresholds
For comprehensive details, taxpayers can refer to Publication 970.
Additional Tax Credits
Beyond these major credits, there are numerous other options for taxpayers. These include:
- Family and Dependent Credits
- Income and Savings Credits
- Homeowner Credits
- Electric Vehicle Credits
- Health Care Credits
Taxpayers should explore the credits and deductions page on IRS.gov to determine their eligibility for these and other benefits.
Final Thoughts
Tax credits are powerful tools for reducing tax liability and, in some cases, increasing refunds. By understanding the differences between refundable and non-refundable credits and staying informed about available options, taxpayers can make the most of their returns.
Author: John S. Morlu II, CPA
John S. Morlu II, CPA, is the CEO and Chief Strategist of JS Morlu, a globally acclaimed public accounting and management consulting powerhouse. With his visionary leadership, JS Morlu has redefined industries, pioneering cutting-edge technologies across B2B, B2C, P2P, and B2G landscapes.
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