Refundable Tax Credit
A refundable tax credit can reduce tax liability below zero, resulting in a refund to the taxpayer. The excess credit amount is paid as a refund even if no tax was owed.
Exam Tip
Refundable = can generate a refund. EITC, ACTC, PTC, and 40% of AOC are refundable. Nonrefundable credits only reduce tax to zero.
What is a Refundable Credit?
A refundable credit not only reduces tax to zero but pays the excess as a refund. This benefits low-income taxpayers who may owe little or no tax.
Major Refundable Credits
| Credit | Maximum (2025) | Form |
|---|---|---|
| Earned Income Tax Credit (EITC) | $7,830 (3+ children) | Schedule EIC |
| Additional Child Tax Credit (ACTC) | $1,700 per child | Schedule 8812 |
| Premium Tax Credit | Varies by income/plan | Form 8962 |
| American Opportunity Credit | $1,000 (40% of $2,500) | Form 8863 |
Refundable vs. Nonrefundable
| Feature | Refundable | Nonrefundable |
|---|---|---|
| Reduces tax to zero | Yes | Yes |
| Excess becomes refund | Yes | No |
| Benefits zero-tax filers | Yes | No |
| Examples | EITC, ACTC | Lifetime Learning, Saver's |
Partially Refundable Credits
The American Opportunity Credit ($2,500 max) is 40% refundable ($1,000) and 60% nonrefundable ($1,500). The Child Tax Credit has a nonrefundable portion and a refundable Additional CTC portion.
Exam Alert
Know which credits are refundable vs. nonrefundable. EITC is the largest refundable credit for low-income workers. ACTC is the refundable portion of the child tax credit. PTC requires Form 8962 reconciliation.
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Related Terms
Nonrefundable Tax Credit
A nonrefundable tax credit can reduce tax liability to zero but cannot generate a refund. Any excess credit beyond the tax owed is lost (unless carryforward rules apply).
Tax Credit vs Tax Deduction
Tax credits reduce tax liability dollar-for-dollar and are more valuable than tax deductions, which only reduce taxable income by a percentage based on your marginal tax bracket.
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