What is 'Refundable Credit'

A refundable credit is a tax credit that is refunded to the taxpayer no matter how much the taxpayer's liability is. Typically, a tax credit is non-refundable, which means that the credit offsets any tax liability the taxpayer owes, but if the credit takes this liability amount down to zero, no actual money is refunded to the taxpayer. In contrast, refundable credits can take the tax liability down below zero and this amount is refunded in cash to the taxpayer.

BREAKING DOWN 'Refundable Credit'

A refundable credit is called refundable because the taxpayer can receive a payment from the U.S. government through the Internal Revenue Service (IRS) if the credit puts the taxpayer's tax liability into the negative numbers. This differs from a non-refundable credit, which can reduce the taxpayer's liability down to zero, but that is the limit. No money can be refunded to the taxpayer, no matter how much of the tax credit is left after the liability hits zero.

A taxpayer can claim a refundable credit that is larger than their tax liability, and the IRS will send them the balance of the credit. A taxpayer with no tax liability cannot use a non-refundable tax credit, because a non-refundable tax credit cannot take a liability balance below zero. A taxpayer with no tax liability, however, can use a refundable tax credit, not matter how large or small the credit is, and will be refunded the full balance of money credited. Therefore it makes sense for a taxpayer to calculate all their taxes already paid, deductions and non-refundable credits, and then calculate and apply any refundable credits. 

Qualifying for Refundable Credit

Whether non-refundable or refundable, tax credits have detailed, specific sets of qualifications a taxpayer must meet to be eligible for. These qualifications may include things like income level, family size, occupation type, investment or savings type, earned income and other specific situations. Credits may be structured as single amounts, percentages of income or tax liability or some other number or a step scale in which taxpayers with higher incomes get a larger credit than taxpayers with higher incomes do.

Some types of taxes cannot be offset by non-refundable taxes and can only be offset by certain refundable taxes. The self-employment tax and tax on premature distributions from retirement accounts are examples of taxes that cannot be offset by all types of credits. The earned income credit is one example of a refundable credit that can offset taxes that cannot be offset by non-refundable credits. 

RELATED TERMS
  1. Tax Credit

    An amount of money that taxpayers are permitted to subtract dollar ...
  2. Foreign Tax Credit

    The foreign tax credit is a non-refundable tax credit for income ...
  3. Tax Refund Anticipation Loan, RAL

    A loan provided by a third party against a taxpayer's expected ...
  4. Additional Child Tax Credit

    The Additional Child Tax Credit is the refundable portion of ...
  5. Refund

    A refund is a payment from the state or federal government for ...
  6. Child Tax Credit

    The child tax credit is a credit given to taxpayers for each ...
Related Articles
  1. Taxes

    Give Your Taxes Some Credit

    A few tax credits can greatly increase the amount of money you get back on your return.
  2. Taxes

    7 Reasons Why You Haven’t Received Your Tax Refund

    The reasons for a delay in getting your tax refund range from incorrect information on your forms to a debt offset. Here are five more, plus remedies.
  3. Taxes

    The Tax Refund: When It Hurts Your Retirement

    A refund can represent a lost opportunity cost for things you could have done in the past.
  4. Taxes

    Filing Early? Some Refunds Will Be Delayed to Feb. 15

    Extra data to fight fraud means some people's tax refunds will be held to Feb. 15. See if it affects you.
  5. Retirement

    5 Top Tax Season Questions

    A tax pro answers questions she hears most often and quashes some myths.
  6. Taxes

    6 Ways the IRS Can Seize Your Tax Refund

    There are debts that can make the government seize your tax refund. Here are the six most prominent, plus what to do if it happens to you.
  7. Personal Finance

    Are You Taking Advantage of the College Tuition Tax Credit?

    Parents with a child enrolled in college should check out the college tuition tax credit, a boon that can help defray the cost of a university education.
  8. Taxes

    Refund Anticipation Loans Generally A Ripoff

    These short-term loans can provide much-needed cash, but the instant payout comes at a cost.
  9. Taxes

    5 Smart Uses For Your Tax Refund

    Consider using the bulk of your refund to take care of long-term needs, like saving for retirement or college.
  10. Taxes

    12 Reasons Your IRS Refund Was Late

    A tax refund can be a nice post-tax reward, but if it's taking too long to arrive, here are the most likely reasons for the hold-up and how to check on it.
RELATED FAQS
  1. What assets are taxable and what assets are not taxable?

    Adjust your taxable income by understanding what assets the IRS taxes. Learn about legal strategies to lower tax liability ... Read Answer >>
  2. What is the difference between a write-off and a deduction?

    Understand the differences between a tax write-off and a tax deduction. Learn how each one works to reduce income taxes and ... Read Answer >>
Trading Center