Not all tax credits are created equal. Some can give you a greater refund and some decrease what you owe to on your tax bill. Getting a better understanding of both types of credit, refundable and nonrefundable, can help you get a better grasp at what you may be receiving back in a tax refund.

Refundable Tax Credit

When you’re eligible to claim a credit that’s refundable and it’s more than your total tax liability, the Internal Revenue Service will send you the balance of the money. For example, if you have a $1,000 refundable tax credit but only owe $300 in taxes, the additional amount of $700 is treated as a tax refund.

Refundable tax credits can offset certain types of taxes that normally can’t be reduced in other ways. They can help offset the self-employment tax, the surtax on early distributions of retirement savings, or even other surtaxes such as the nanny tax, the net investment income tax, or the additional Medicare tax.

Current refundable tax credits are:

  • The Earned Income Tax Credit
  • The Child and Dependent Care Credit
  • The Saver’s Credit

Nonrefundable Tax Credit

While we wish that credits were all refundable, most are nonrefundable. A nonrefundable tax credit can only reduce your federal income tax liability to zero. Any part of the credit that’s left over is not refunded back to you. The IRS gets to keep that part of the money. For example, you have a nonrefundable tax credit of $1,000 but only owe $800 in taxes. Your $800 dollars in taxes is erased and no additional money ($200 in this example) is refunded back to you.

Current nonrefundable tax credits are:

  • Adoption Tax Credit
  • Foreign Tax Credit
  • Mortgage Interest Tax Credit
  • Residential Energy Property Credit
  • Credit for the Elderly or the Disabled
  • Child Tax Credit (tax years prior to 2018)

Partially Refundable Tax Credit

Some tax credits are only partially refundable such as:

  • Child Tax Credit (starting in 2018)
  • American Opportunity Tax Credit (up to 40% is refundable)

A credit’s label of refundable or nonrefundable can change yearly. Visit the IRS website or consult with a tax professional to be sure while filing taxes. If you’re eligible, claim the credit regardless of whether it’s refundable or nonrefundable. The only bad tax break is one you didn’t take advantage of.

If you seek help or answers about refundable and nonrefundable tax credit, contact your tax accountant in Missouri. Schultz, Wood & Rapp P.C. is happy to help you navigate your tax refund.