Tax credits, in general, can be broken down into two types: refundable and non-refundable. A refundable credit can be applied against any amount of tax you paid throughout the year and wipe out your liability to zero, which gets paid back to you as a refund. Some examples of refundable tax credits are the earned income credit (EITC), premium tax credit for health insurance, and American Opportunity tax credit for college tuition. A non-refundable credit only reduces your tax liability to zero but cannot be used to increase your refund or create one that you wouldn’t otherwise have received. In addition, non-refundable tax credits can only be used to offset taxes owed, and any remaining credits cannot be paid out as a refund.
A well-known example of a non-refundable tax credit is the Child and Dependent Care Credit, which can be claimed by parents who pay for the care of their children or dependents. This credit was made fully refundable starting in 2021, which means that if it’s bigger than the total tax liability, the excess is paid out as a refund. But the other well-known non-refundable tax credit is the foreign tax credit, which has no carryover provisions. In other words, any excess credit is lost.
The Most Common Non-refundable Tax Credits
- Child and Dependent Care Credit: This credit helps offset the cost of child or dependent care expenses incurred to allow you to work or look for work.
- Child Tax Credit: A credit for each qualifying child under the age of 17, designed to help lower-income families.
- Credit for the Elderly or Disabled: This credit is for taxpayers over a certain age or those who are permanently and totally disabled.
- Education Credits (American Opportunity Credit and Lifetime Learning Credit): These credits help offset the costs of higher education, such as tuition, fees, and related expenses.
- Retirement Savings Contributions Credit (Saver’s Credit): This credit is for eligible individuals who contribute to retirement accounts like IRAs or 401(k)s.
- Foreign Tax Credit: If you paid taxes to a foreign country, this credit can help reduce your U.S. tax liability.
- Residential Energy Credits: These credits are for making certain energy-efficient improvements to your home, such as solar panels or energy-efficient windows.
- Mortgage Interest Credit: Some states offer this credit for first-time homebuyers or low-income individuals who qualify for a mortgage credit certificate.
- Adoption Credit: A credit for qualifying adoption expenses incurred during the process of adopting a child.
- Plug-In Electric Vehicle Credit: This credit encourages the adoption of electric vehicles by providing a credit for qualified plug-in electric vehicles.
- Low-Income Housing Credit: A credit for investing in affordable housing projects.
- Qualified Plug-In Electric Drive Motor Vehicle Credit: A credit for purchasing certain types of electric vehicles.
- Disabled Access Credit: This credit is for eligible small businesses that make their premises more accessible to disabled individuals.
- Work Opportunity Tax Credit: This credit encourages employers to hire individuals from targeted groups facing significant barriers to employment.
- Biodiesel and Renewable Diesel Fuels Credit: A credit for the use of these alternative fuels.
- Empowerment Zone and Renewal Community Employment Credit: This credit is aimed at encouraging employment and economic growth in designated empowerment zones and renewal communities.
- Indian Employment Credit: A credit for employers of qualified Native American individuals.
- Orphan Drug Credit: A credit for qualified clinical testing expenses incurred in testing certain drugs for rare diseases.
- Research and Development Credit: This credit incentivizes businesses to invest in research and development activities.
- Historic Rehabilitation Credit: A credit for rehabilitating certified historic structures.
