What is a Refundable Tax Credit?

You may be familiar with what tax credits are, but you may be wondering:

•  What are refundable credits?
•  What are non-refundable credits?

These terms have been thrown around a lot lately, especially when it comes to the latest recovery rebate credit or some of the latest changes with credits for dependents.

What is a Refundable Tax Credit vs. Nonrefundable Tax Credits? 

A refundable tax credit can be paid to the taxpayer even if they don’t owe taxes. Refundable tax credits can actually increase your refund amount if there is any money left over after your taxes are reduced to zero. On the other hand, nonrefundable tax credits reduce the amount that you owe the IRS to zero but won’t put any extra money in your pocket for any additional amount of the credit leftover beyond what you owe.

Below is a list of common refundable tax credits: 

1. Earned Income Tax Credit (EITC) is designed for moderate to low income earners. Generally it is based on income and qualifying dependents. The EITC continues to be a refundable credit meaning even if you don’t owe any taxes you can still get the credit which can boost your tax refund. The maximum tax credit for 2023 tax year – which applies to tax returns filed in 2024 – is $7,430 for taxpayers with three or more qualifying children. This means even if you don’t owe any taxes, you could see a boost to your refund of up to $7,430 if you have three or more kids and meet the other eligibility requirements.
2. Child Tax Credit (CTC) is worth a maximum credit amount of $2,000 per qualifying dependent child under age 17. The credit is partially refundable up to $1,600. 
3. Child and Dependent Care Credit is typically not refundable. This means that claiming the Child and Dependent Care Credit can reduce what you owe the IRS but you can’t get what’s left over of the credit in a refund once it reduces your taxes to zero. But under the American Rescue Plan of 2021, for tax year 2021 only (the taxes you filed in 2022), the Child and Dependent Care Credit was fully refundable. If you were working or actively seeking work, and you paid childcare for your dependent who is under the age of 13 (no age limit if disabled), you can claim the Child and Dependent Care Credit. Nursery school, private kindergarten, after-school programs, daycare and even summer and winter day camps are all qualifying expenses. The expense limit is $3,000 for one qualifying individual and $6,000 for more than one qualifying individual, and the percentage used to calculate the credit is up to 35% of expenses. While this credit is no longer refundable for the current 2023 tax year this credit may still reduce your tax liability. 
4. American Opportunity Tax Credit is an education tax credit up to $2,500 for college expenses. Part of this credit is refundable, and part of it is nonrefundable. The first 40% is refundable and is capped at $1,000. Meaning if the credit reduces what you owe to 0 then you can have 40% of the remaining amount up to $1,000 refunded to you. The other 60% is nonrefundable. In order to qualify, the student must be enrolled in a qualifying program for at least half time, and it only applies to postsecondary education. 
5. Premium Tax Credits can in some situations, be a refundable credit. For example, if a taxpayer had health insurance through the Health Insurance Marketplace and was eligible to receive assistance from the IRS toward the cost of monthly insurance premiums but did not, they may be eligible for a refundable Premium Tax Credit. If any eligible assistance was not paid out from the government to the insurance company throughout the year, then the taxpayer may be able to receive a Premium Tax Credit as a refundable credit that will lower the amount they owe to the IRS or increase their refund amount. 

In some cases, people may not file their taxes if they make under the income filing thresholds, but if you had taxes withheld from your pay and are eligible for any of these refundable credits mentioned, you may want to file your taxes. Every year the IRS has unclaimed refunds of over $1 billion dollars and much of the unclaimed refunds belong to people who don’t file and may be eligible for unclaimed refunds.

No matter what moves you made last year, TurboTax will make them count on your taxes. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund – guaranteed. 

Lisa has over 20 years of experience in tax preparation. Her success is attributed to being able to interpret tax laws and help clients better understand them. She has held positions as a public auditor, controller, and operations manager. Lisa has appeared on the Steve Harvey Show, the Ellen Show, and major news broadcast to break down tax laws and help taxpayers understand what tax laws mean to them. For Lisa, getting timely and accurate information out to taxpayers to help them keep more of their money is paramount. More from Lisa Greene-Lewis

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