A nonrefundable tax credit is a type of tax credit that reduces a taxpayer’s tax liability but cannot result in a refund if the credit exceeds the total amount of taxes owed. In other words, if a taxpayer’s nonrefundable tax credit is larger than their tax liability, the excess credit is forfeited.
Common examples of nonrefundable tax credits include:
- Child and Dependent Care Credit.
- Lifetime Learning Credit.
- Saver’s Credit.
For example, if a taxpayer owes $1,000 in taxes but qualifies for a $1,200 nonrefundable credit, their liability is reduced to zero, but the additional $200 is not refunded to them.
While nonrefundable credits can help lower tax liability, they are not as advantageous as refundable credits, which can result in a refund if the credit exceeds the tax owed. Taxpayers should understand which credits are nonrefundable and plan their tax strategies accordingly to maximize their benefits.