Refundable Tax Credit
IntermediateA refundable tax credit is a tax credit that can reduce a person's tax bill below zero, so any amount left over after the tax is cleared is paid to them as a refund.
A tax credit reduces the tax owed directly, unit for unit, unlike a deduction, which reduces the income that is taxed. With a refundable credit, the taxpayer receives the full value of the credit even if it is larger than the tax they owe.
For example, if someone owes 800 in tax and qualifies for a refundable credit of 1,000, the credit wipes out the 800 and the remaining 200 is paid to them.
Governments often use refundable credits to support lower-income households, because people with little or no tax liability can still benefit. Examples include credits for working families and for children in several countries.
Because they involve payments to taxpayers, refundable credits can be targets for fraud and errors, and tax authorities may check claims carefully. Some credits are partly refundable, meaning only a portion of any excess is paid out. The opposite is a nonrefundable credit, which can only reduce tax to zero.
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