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. Non-Refundable Tax Credit

    A non-refundable tax credit is a tax credit that can only reduce ...
  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. Tax Benefit

    A tax benefit is an allowable deduction on a tax return intended ...
  5. Tax Liability

    A tax liability is the amount an individual, corporation or other ...
  6. IRS Publication 929: Tax Rules ...

    IRS Publication 929: Tax Rules for Children and Dependents is ...
Related Articles
  1. Taxes

    What's IRS Form 1040 For?

    Most U.S. taxpayers will be familiar with the 1040. By the end of filling it out, you'll know how much tax you owe, or what your refund is.
  2. 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.
  3. Taxes

    Taking the Fun out of Tax Refunds

    Getting a tax refund isn't really the big windfall it seems to be. Here's why.
  4. Taxes

    Defunct: Refundable AMT Credit for Employee Stock Option Taxes

    These refundable AMT credits helped taxpayers save on taxes, AMT bills and more – but expired in 2012.
  5. 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.
  6. Taxes

    Saver's Tax Credit: A Retirement Savings Incentive

    Here's another reason to put money toward your retirement nest egg.
  7. Personal Finance

    5 Airlines That Offer Refundable Plane Tickets

    Compare prices for non-refundable and refundable airline fares for five of the United States' most popular airlines, and learn about varying cancellation fees.
  8. 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.
  9. Investing

    H&R Block Offers Interest-Free Loans to Tax Filers

    The Financial Industry Regulatory Authority, or FINRA, has deemed tax refund anticipation loans as being akin to payday loans. Many tax preparation companies offer filers the option of receiving ...
  10. Taxes

    This Explains $0 Federal Income Tax for Millions

    Understand how the earned income tax credit works and whether it applies to you.
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