Refundable and Nonrefundable Tax Credits
Refundable or
Nonrefundable
Tax Credit?
A tax credit helps reduce the amount of income tax you owe to the government. Think of it as a discount on your taxes. There are two types of tax credits: refundable and non-refundable.
Refundable tax credits can not only lower your tax bill but also increase your tax refund if the credit amount is more than what you owe. For example, if you owe $200 in taxes but have a $300 refundable credit, you'll get a $100 refund. Non-refundable tax credits, on the other hand, can only reduce your tax bill to zero. If the credit is more than you owe, you won't get any extra money back.
What Types of Tax Credits Are Available?
Be sure that you complete all tax credits forms or sections when preparing your return so they can be applied to your return and credited towards your balance. Tax credits are applied to your taxes owed plus paycheck tax withholdings shown on your W-2 wage form or other Form 1099 related tax estimates.
In summary: Many taxpayers will reduce their tax liability with non-refundable tax credits. Even if your tax liability is reduced to zero, you could still receive a tax refund on the final 1040 IRS tax return. Let eFile work for you; all your tax credits and deductions are calculated for you.
With refundable tax credits, you can receive an IRS tax refund
if the tax credit is larger than the amount of tax you owe.
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Check out the details and examples of non-refundable and refundable credits below.
What Are Non-refundable Tax Credits?
- Nonrefundable tax credits can only reduce your tax liability to $0.
- If you owe taxes, you can use these credits to offset your tax amount.
- Example: If your tax liability is $3,000 and you have a $5,000 nonrefundable tax credit:
- Your tax liability reduces to $0.
- You do not receive the extra $2,000 ($5,000 - $3,000).
- If your tax liability is already $0 when applying the credits, you will not benefit from them at all.
Below is a table of nonrefundable tax credits with helpful links and calculators. eFile will calculate these for you when you file your return online through your eFile account.
Child and Dependent Care Tax Credit
This credit can offset the expenses of
paying for childcare; use the
CAREucator tax tool to see if you qualify for it.
Note: This tax credit was refundable for your 2021 Return only, it is nonrefundable for all other years - details are on the linked page.
Elderly and Disabled Tax Credit
This credit can be used to offset your tax liability if you are
65 or older and/or disabled while meeting certain qualifications. If you are 65 or over as of the end of the year, you may be entitled to an additional sum in
standard deductions - eFile will calculate this all for you and include the Elderly and Disabled Credit if you qualify on Schedule R and include it with your
Form 1040 or 1040-SR.
Saver's Tax Credit
Get paid and rewarded for saving for retirement!
The Saver's Credit may allow you to reduce your income tax for making
contributions to a retirement plan. View the eligibility requirements on the linked page and see if you may be eligible for a credit of up to $2,000.
Two Home Improvement Credits
Carryforward/Carryover
If you made
energy saving improvements to your home by installing an earth-friendly energy source, you may be able to take advantage of one or both
energy efficient upgrade credits: the Energy Efficient Home Improvement Credit and/or Residential Clean Energy Credit. Additional credit amount may be carried over to your next tax return.
Electric Vehicle Credit
The
Clean Vehicle Credit - formally the Qualified Plug-In Electric Drive Motor Vehicle Credit - can be worth up to $7,500 in nonrefundable credit. Review the linked page for a list of qualifying vehicles. See also:
tax credit for purchasing a hybrid.
Alternative Motor Vehicle Credit
The Alternative Motor Vehicle Tax Credit is for placing a qualified fuel cell vehicle in service and may only be claimed by the original purchaser of the vehicle.
Mortgage Interest Credit
The credit for paying interest on a home mortgage is claimed with your tax return and e-filed via Form 8396. This credit can only be claimed if a Mortgage Credit Certificate is used by the state or local government. This is separate from the
Mortgage Interest Deduction.
Credit to Holders of Tax Credit Bonds
This credit applies to holders of qualified tax credit bonds including new qualified zone academy bonds, clean renewable energy bonds, qualified energy conservation bonds, and qualified school construction bonds.
General Business Credit
This is a collection of various credits that can be claimed to promote business activities such as research, investment, and providing childcare services.
Credit Carryforward or Carryover
A credit carryforward, also called a carryover, allows you to apply a leftover amount of a previous year tax credit to a current year tax return. The eFile.com software will allow you to enter the carryover amount from the previous tax year.
What Is a Refundable Tax Credit?
- A refundable tax credit provides a dollar-for-dollar payment to you.
- You receive the full amount of the credit, regardless of your tax liability or refund size.
- Example 1: If you owe $3,000 and qualify for a $5,000 credit:
- Your taxes reduce to $0.
- You receive $2,000 ($3,000 - $5,000 = a refund of $2,000).
- Example 2: If you have a $2,000 refund and qualify for a $3,000 credit:
- Your refund increases to $5,000 ($2,000 + $3,000 = $5,000).
- Refundable tax credits guarantee payment of the full credit amount.
- eFile can assist in claiming all eligible tax credits.
What Are the Best Refundable Tax Credits?
The table below summarizes some of the most common and beneficial tax credits. Included are links to more information and calculators for the credits.
Child Tax Credit (CTC)
The
Child Tax Credit helps with the many expenses of raising a child; this credit is
partially refundable. Use the
CTC calculator or CHILDucator to see if you qualify for this tax credit. The Additional Child Tax Credit is the refundable part of the Child Tax Credit.
Note: The CTC was fully refundable in 2021 only; you cannot claim the
advance Child Tax Credit payments on any other return.
The American Opportunity Tax Credit
Claim a
tax credit for going to college; apply for this credit for help with paying for
higher education for you or your qualifying dependent. This credit is partially refundable and can be worth up to $2,500.
Alternative Fuel Vehicle Refueling Property Credit
As a homeowner or resident, claim a credit for installing an alternative fuel property your home, including a charger for your electric vehicle or other green property.
Expired: Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals
The refundable Credit for Sick Leave and Family Leave for Certain Self-Employed Individuals is filed via
IRS Form 7202. You can
file back taxes to claim this credit.
Expired: Employee Retention Credit
This tax credit is for businesses only who paid certain wages to employees due to hardship caused by COVID-19. As an employer, you may be entitled to this credit for 2020 and/or 2021
After getting your amounts for applicable credits using the calculators above, see this free and simple TAXstimator below. In the Credits portion, input the amounts and it will help accurately calculate your next tax return refund or taxes owed.
Start TAXstimator
Make IT Less Taxing: IT is Income Taxes and the eFile Tax App requires only simple entries to do all the complicated tax credit, deduction, and bracket calculations for you on both the federal and state levels. Start for free and see how simple filing your own taxes can be.
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