March 11th, 2013
There are non-refundable tax credits and refundable tax credits. What is the difference? Examples?
There are non-refundable tax credits and refundable tax credits. What is the difference? Examples?
Non-refundable tax credits reduce the amount of tax you owe. Or another way to say it is a non-refundable tax credit can’t reduce your taxes less than zero. You can reduce your taxes to zero, but you can’t save more than you owe. Examples of non-refundable tax credits are alternative motor vehicle credit, child tax credit, residential energy credit, child and dependent care credit, retirement savings contribution credit and foreign tax credit.
A refundable tax credit can reduce your tax burden beyond what you owe, so you can use these to eliminate the taxes you owe and in addition receive a credit instead of paying tax even if you owe $0. One example of refundable tax credit is the EITC (Earned Income Tax Credit). In 2014 there will be a refundable tax credit for people who purchase health insurance from public exchanges.
Great answer, Aaron. It was right on target. Well done.