A refundable tax credit is a tax credit that not only reduces a taxpayer’s liability but can also result in a refund if the credit exceeds the amount of taxes owed. Unlike nonrefundable tax credits, which only reduce tax liability to zero, refundable credits allow taxpayers to receive the remaining amount of the credit as a refund.
Common examples of refundable tax credits include:
- Earned Income Credit (EIC).
- Additional Child Tax Credit.
- Premium Tax Credit.
For example, if a taxpayer owes $500 in taxes but qualifies for a refundable credit of $1,000, their liability is reduced to zero, and they will receive a $500 refund from the IRS.
Refundable tax credits are particularly valuable because they can result in a refund, even for taxpayers who owe little to no tax. Low-income taxpayers, in particular, benefit from refundable credits like the EIC, which can provide much-needed financial relief through refunds. Understanding refundable credits can help taxpayers maximize their tax savings and increase their refunds.