What is Refundable tax credit?
In short
A refundable tax credit can reduce tax below zero, so any excess is paid to the taxpayer as a refund. A nonrefundable credit can only reduce tax to zero.
Key takeaways
- Refundable examples: the earned income credit, the additional child tax credit and 40% of the American Opportunity credit.
- Nonrefundable examples: the Lifetime Learning credit and the child and dependent care credit.
- Credits reduce tax dollar for dollar, while deductions reduce taxable income.
Where it's tested
REG: Filing Status, Credits & Alternative Minimum Tax — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
The primary difference between a refundable and a nonrefundable tax credit is that a refundable credit: