Nonrefundable Tax Credit
IntermediateA nonrefundable tax credit is a tax credit that can reduce a person's tax bill only down to zero. Any part of the credit that exceeds the tax owed is lost, unless the rules allow it to be carried forward.
Like all tax credits, a nonrefundable credit reduces the tax owed directly. But it cannot create a refund. Its value is capped at the taxpayer's tax liability.
For example, if someone owes 800 in tax and has a nonrefundable credit of 1,000, their tax falls to zero, but the remaining 200 of credit is not paid to them.
This means nonrefundable credits are worth less to people with low tax bills. Two households with the same credit can benefit by very different amounts, depending on how much tax they owe.
Some nonrefundable credits allow unused amounts to be carried forward to future years, so the benefit is not lost entirely. When a taxpayer has several credits, the order in which they are applied can matter, since refundable credits are usually applied after nonrefundable ones. The opposite is a refundable credit, which pays out any excess.
For worked examples and full lessons, visit notesbysara.org.