What’s the Difference Between Refundable and Non- Refundable Tax Credits?

Introduction

Tax credits help reduce your tax liability, but not all tax credits work the same way. There are two
types of credits:

•  Refundable tax credits can reduce your tax bill below zero and result in a refund.
•  Non-refundable tax credits can only reduce your tax liability to zero but won’t generate a
  refund.

Understanding the difference can help you maximize your tax savings and increase your refund.
This guide explains how each type of tax credit works, examples of both, and how to claim them in
2025.

What Are Refundable Tax Credits?

Refundable tax credits allow you to receive money back even if your tax liability is zero. If the credit
exceeds your total tax due, the IRS will issue the remaining amount as a refund.

Examples of Refundable Tax Credits

•  Earned Income Tax Credit (EITC) – IRC § 32
•  Designed for low-to-moderate-income workers.
•  Maximum EITC for 2025: Up to $7,430 for families with three or more children.
•  Additional Child Tax Credit (ACTC) – IRC § 24
•  If you qualify for the Child Tax Credit (CTC) but can’t claim the full amount, you may get a refund of up to $1,600 per child.
• Premium Tax Credit (PTC) – IRC § 36B
•  Helps offset health insurance premiums purchased through the Marketplace.
•  If your income was lower than estimated, you could receive a refund for excess
  premium payments.
•  American Opportunity Credit (AOC) – IRC § 25A
• Refundable up to 40% of the credit ($1,000 maximum refund) for qualifying college
  expenses.

What Are Non-Refundable Tax Credits?

Non-refundable tax credits can lower your tax liability to zero but do not generate a refund. If the
credit exceeds your total tax due, the excess amount is lost, unless it can be carried forward.

Examples of Non-Refundable Tax Credits

•  Child Tax Credit (CTC) – IRC § 24
• Maximum credit: $2,000 per child
• Only $1,600 of the credit is refundable; the remaining portion is non-refundable.
• Lifetime Learning Credit (LLC) – IRC § 25A
•  Provides up to $2,000 per tax return for tuition and education expenses but does
  not generate a refund.
•  Saver’s Credit – IRC § 25B
•  Helps low-income earners save for retirement, with a credit of up to 50% of IRA or
  401(k) contributions.
•  Foreign Tax Credit (FTC) – IRC § 27
•  Reduces double taxation on foreign-earned income, but excess amounts must be
  carried forward instead of refunded.

Key Differences Between Refundable and Non-Refundable Credits

How to Claim Tax Credits on Your Tax Return

Step 1: Check Eligibility

•  Meet income limits and filing requirements for each credit.
•  Gather supporting documents such as Form 1098-T (education), Form 1099-DIV (foreign tax
  credit), or Form 1095-A (health insurance premium credit).

Step 2: Complete the Correct Tax Forms

•  Earned Income Tax Credit (EITC): Schedule EIC (Form 1040)
•  Child Tax Credit (CTC): Schedule 8812
•  Education Credits (AOC, LLC): Form 8863
•  Foreign Tax Credit: Form 1116

Step 3: Report the Credit on Form 1040

•  Enter refundable tax credits on Line 27-31 of Form 1040.
•  Enter non-refundable tax credits on Line 19-26 of Form 1040.

IRS Forms & Compliance Checklist

•  Form 1040 – Main tax return
•  Schedule EIC – Earned Income Credit
•  Form 8863 – Education credits
•  Form 1116 – Foreign tax credit
•  Schedule 8812 – Child Tax Credit

Conclusion

Understanding the difference between refundable and non-refundable tax credits is essential for
maximizing your refund and tax savings. Refundable credits provide cash back, while non-
refundable credits only reduce taxes owed.

For expert tax guidance, schedule a consultation with Anshul Goyal, CPA EA FCA, a licensed tax
professional and IRS representative.

Frequently Asked Questions (FAQs)

1. Can I get a refund if I only qualify for non-refundable credits?
No, non-refundable credits only reduce your tax liability to zero.

2. Do refundable credits always result in a refund?
Yes, if your credit amount exceeds your tax bill, you will receive a refund.

3. Can I claim both refundable and non-refundable credits?
Yes, you can claim both types of credits if you qualify.

4. Do tax credits carry over to the next year?
Some non-refundable credits, like the Foreign Tax Credit, may carry forward to future years.

5. Can I claim tax credits if I take the standard deduction?
Yes, most tax credits are available whether you take the standard deduction or itemize.

About Our CPA

Anshul Goyal, CPA EA FCA is a licensed Certified Public Accountant and an IRS Enrolled Agent (EA).
He specializes in tax credits, deductions, and IRS compliance to help taxpayers maximize savings.

Schedule a consultation today with Anshul Goyal, CPA, to optimize your tax refund.