Posted by The TaxAdvocate Group, LLC

Five Things to Know About Refundable Tax Credits

Five Things to Know About Refundable Tax Credits

When filing a tax return each year, taxpayers may have different goals in mind. Some may want to reduce the amount of tax owed, seek a refund as much as possible, or avoid paying more tax than they are legally required to pay. Tax credits can help you achieve all of these goals.

There are two types of credits available to taxpayers: refundable and non-refundable.

  • Both types of credit offer the possibility of reducing the amount of tax owed.

  • Refundable tax credits can also give you a tax refund when you have no tax payable.


Refundable credits can provide you with a tax refund.

Refundable tax credits are said to be “refundable” because if you are entitled to a refundable credit, and the credit amount is greater than the tax due, you will receive a refund of the difference.

  • For example, if you owe $700 in tax and qualify for a refundable credit of $ 1,000, you will receive a repayment of $300.

  • As with payroll deduction, refundable tax credits are treated as tax payments. This implies that the amount of a refundable tax credit is deducted from the amount of tax due, just like the amount of tax withheld from wages.

  • The refund amount can be substantial with some of the larger refundable credits, such as the earned income tax credit. This makes refundable credits one of the most valuable parts of your tax return.


Even with zero tax liability, you can qualify.

Some taxpayers may find that non-refundable credits, deductions, or other circumstances leave them exempt from taxes. Even without the taxes owed, the taxpayers can still apply for the refundable credits they are entitled to and can receive the amount or credits as repayment.

  • For example, if you have no income tax payable and are eligible for a refundable tax credit of $1,000, you will receive a total of $1,000 in reimbursement.

  • For this reason, when doing taxes, remember to calculate any refundable tax credit after calculating all tax credits, deductions, and non-refundable payments.


Each credit has different qualifications.

All tax credits come with a number of requirements that the taxpayer must meet in order to get the credit. Some common requirements include:

  • A level of income within a certain range,

  • Family size, or

  • The requirement for the taxpayer to have some earned income.

While some credits are specific to low-income taxpayers, others have much higher income limits. Many credits also have a sliding scale in which lower-income taxpayers are entitled to more credit than wealthier taxpayers.


The credits available vary from year to year.

There is no guarantee that a tax credit will be available or not every year. Each year, Congress has the option of expanding many of the tax credits available the previous tax year.

  • Some credits are designed as part of a stimulus package to help jumpstart the economy and will then expire after a limited number of years.

  • If Congress decides not to extend the credit, the credit expires.

  • An example is the Making Work Pay credit, which provided for a refundable credit of $400 for individuals and $800 for couples filing jointly. It was available in fiscal 2009 and 2010, but the credit is no longer available because Congress did not vote to extend it.


Congress can change the rules at any time.

When deciding if to extend a tax credit or let it expire, the federal government sometimes compromises by changing the terms of the credit, making it more or less valuable than in previous years.

For example, the First Time Buyer credit created in 2008 had an initial value of up to $7,500, with the obligation for the taxpayer to pay an annual royalty. Instead of letting it expire at the end of 2008,

  • The first-time homebuyer credit was extended and amended for homes purchased in 2009 and 2010.

  • The altered credit was worth up to $8,000 and did not need to be paid back unless the buyer sold or moved it.

The federal government can also change the terms of the credit. For example,

  • The credit can be changed from refundable to non-refundable or

  • The credit qualification can be changed by changing the number of people who can benefit from the said credit.


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