What are non-refundable tax credits?

Looking for a better way to lower what you owe during tax season? That’s where tax credits can come in and save the day. Unlike deductions, which only reduce taxable income, tax credits directly cut the amount owed to the IRS. Non-refundable tax credits apply until your tax bill hits zero, but they won’t provide any leftover money as a refund. On the other hand, refundable credits can dip below zero and possibly grant a refund. 

Let’s take a further look at non-refundable tax credits and see how they stand apart from their refundable counterparts.

Refundable vs. non-refundable tax credits

Before jumping into specifics, let’s quickly clarify how non-refundable and refundable tax credits differ. This overview will help you figure out which type may best fit your unique tax situation.

Non-Refundable Credits

An example of a non-refundable credit includes the Child and Dependent Care Credit. They lower what you owe until your tax liability hits zero. For instance, if you owe $500 in taxes and your credit is $1,000, your liability goes down to $0, but you won’t get a refund for the remaining $500.

Refundable Credits

A prime example of a refundable tax credit is the Earned Income Tax Credit (EITC). These credits not only reduce your liability to zero, but if any credit remains, it’s issued as a refund. If you owe $500 and claim a $1,000 refundable credit, you’ll end up with $0 tax due and receive the extra $500 back.

Common types of non-refundable tax credits

When tax season comes around, every little bit counts. Non-refundable tax credits can have a significant impact by reducing the amount you owe the IRS. Although these credits won’t offer a refund beyond eliminating your entire tax bill, they can still save you money and help lower your overall liability. Let’s take a look at some common types of non-refundable tax credits and how they work.

• Child and Dependent Care Credit (portion of it): Helps offset the cost of care for children or dependents while you work or look for work.
• Lifetime Learning Credit: Provides a tax break for education expenses, including tuition and related costs for post-secondary education.
• Saver’s Credit: Offers a reduction in taxes for eligible contributions to retirement savings accounts.
• Foreign Tax Credit: Prevents double taxation by allowing you to claim credits for income taxes paid to a foreign government.
• Adoption Credit: Assists with some of the expenses related to adopting a child.
• American Opportunity Tax Credit (partially non-refundable): Helps cover qualified education expenses during the first four years of higher education.

How non-refundable tax credits work

Let’s break down how non-refundable tax credits work:

• Calculate Your Tax Liability: Start by determining the total amount you owe based on your taxable income.
• Apply the Credits: Use any non-refundable credits you qualify for to reduce your tax bill dollar for dollar.
• Unused Credit: If your credits exceed what you owe, any extra amount is typically lost unless it qualifies as a carryforward credit (for example, sometimes the Foreign Tax Credit can be carried forward).

Impact on Your Tax Return

On your tax return, non-refundable tax credits can positively impact you by directly lowering the amount you owe. They reduce your overall tax bill, making it more manageable. However, it’s important to understand the limitation: if the credits reduce your tax liability to zero and there’s still credit left, you won’t receive a refund for the remaining amount. Unlike refundable credits, non-refundable credits can’t generate a tax refund if your liability is fully covered and extra credit remains. 

Simplify your filing with a non-refundable tax credit

At Credit Central, our experienced tax professionals guide you through every step of the process. We help you gather all the required documents while keeping you clear of costly penalties or missed deadlines. With our dedicated support, you can make the most of your non-refundable tax credit and secure the maximum refund available—giving you more flexibility to use your money where it matters most. 

Choose Credit Central and leave behind the headaches of IRS filings and future tax concerns for a simplified, stress-free tax preparation experience.