What is a Refundable Tax Credit?

Tax credits help you save by reducing your tax bill. If your credit is more than you owe in taxes, you may be able to receive the rest of the credit in the form of a refund. That is if it’s a refundable tax credit.

Most tax credits are nonrefundable, meaning that they can reduce your taxes to $0 then  the credit no longer applies. So, how do you know which ones might result in a refund? 

We explain the difference between the different types of credits and what to expect if you qualify for any that are refundable as you prepare for tax time.

Key takeaways: Refundable tax credits

• Refundable tax credits allow you to receive a refund if the amount is  larger than the amount you owe in taxes.
• Nonrefundable tax credits only allow you to reduce your taxes owed to $0.
• Tax credits can be nonrefundable, refundable, or partially refundable.
• Examples of refundable or partially refundable tax credits include the Child Tax Credit and American Opportunity Tax Credit.
• Tax credit amounts and limits can change each year.
• Filing your return is necessary to claim credits.

What is a refundable tax credit vs. nonrefundable tax credit? 

A refundable tax credit can be paid to the taxpayer even if they don’t owe taxes. Refundable tax credits can actually increase your refund amount if there is any money left over after your taxes are reduced to zero.

For example, if you owe $500 in taxes and have a $1,000 refundable tax credit, you can receive $500 as a tax refund.

On the other hand, nonrefundable tax credits reduce the amount that you owe the IRS to zero but won’t put any extra money in your pocket for any additional amount of the credit leftover beyond what you owe.

What is a partially refundable tax credit?

A partially refundable tax credit still allows you to receive a refund after your taxes owed are reduced to $0, but you can only receive a portion of the credit as a refund.

The American Opportunity Tax Credit (AOTC) is an example of a partially refundable tax credit. While the AOTC is worth up to $2,500, you can only receive $1,000 of the credit in the form of a refund.

While partially refundable tax credits aren’t as flexible as refundable credits, you can still reduce the taxes you owe and receive a partial refund for your tax credit.

4 Common refundable tax credits

Below is a list of common refundable tax credits:

1. Earned Income Tax Credit (EITC)

Earned Income Tax Credit (EITC) is designed for moderate to low-income earners. Generally, it is based on income and qualifying dependents. The EITC continues to be a refundable credit meaning even if you don’t owe any taxes you can still get the credit which can boost your tax refund.

The maximum tax credit is $7,430 for the 2023 tax year and  $7,830 for the 2024 tax year for taxpayers with three or more qualifying children. This means even if you don’t owe any taxes, you could see a boost to your refund of up to $7,830 if you have three or more kids and meet the other eligibility requirements.

2. Child Tax Credit

Child Tax Credit (CTC) is worth a maximum credit amount of $2,000 per qualifying dependent child under age 17. The credit is partially refundable up to $1,700 for tax year 2024.

3. American Opportunity Tax Credit  

American Opportunity Tax Credit is an education tax credit of up to $2,500 for college expenses. Part of this credit is refundable, and part of it is nonrefundable.

The first 40% is refundable and is capped at $1,000. This means that if the credit reduces what you owe to 0, then you can have 40% of the remaining amount, up to $1,000, refunded to you. The other 60% is nonrefundable. In order to qualify, the student must be enrolled in a qualifying program for at least half time, and it only applies to postsecondary education. 

4. Premium Tax Credit

The Premium Tax Credits can in some situations, be a refundable credit. For example, if a taxpayer had health insurance through the Health Insurance Marketplace and was eligible to receive assistance from the IRS toward the cost of monthly insurance premiums but did not, they may be eligible for a refundable Premium Tax Credit.

If any eligible assistance was not paid out from the government to the insurance company throughout the year, then the taxpayer may be able to receive a Premium Tax Credit as a refundable credit that will lower the amount they owe to the IRS or increase their refund amount. 

3 Important things to know about refundable tax credits 

As a taxpayer, it’s understandable that you’ll be eager to take advantage of these refundable tax credits that can help you reduce your taxes and increase your refund, but tax credit amounts and eligibility can change from year to year, so it’s important to check for updates.

The refundable tax credit you claimed last year might not be refundable this year. Tax credit amounts and restrictions can also change. Here’s what you should know before claiming a refundable tax rebate.

1. Which credits are refundable can change 

As new laws are passed and tax rules change, some refundable tax credits may become nonrefundable. Fully refundable tax credits can also become partially refundable.

But navigating tax credit rules doesn’t have to be stressful; working with a tax expert is an easy way to keep track of changes to tax credits and deductions, so you can make sure you’re saving as much as possible.

You also have to qualify for tax credits to claim them, and the criteria for qualifying can change from year to year. Before filing your taxes, review current tax credits and tax law changes for that tax year.

If you have any questions about tax credit changes for the current tax year, a TurboTax expert can help.

2. The amounts for each refundable credit can change each year

Each refundable tax credit has a set limit. For the AOTC, you can receive a maximum credit of $2,500 per student each year. For the EITC, your limit is based on the number of children you have and your filing status.

While there are specific parameters for tax credits, those limits can change and are often increased from year to year. 

The amount you receive in tax credits can also be affected by a variety of factors, including: 

• Filing status
• Income
• How many dependents you have

As you prepare for tax time, our blog is a helpful resource for staying on top of all the latest tax news.

3. Do you have to file taxes to be eligible for refundable tax credits?

In some cases, people may not file their taxes if they make under the income filing thresholds, but if you had taxes withheld from your pay and are eligible for any of these refundable credits mentioned, you may want to file your taxes. 

Every year, the IRS has unclaimed refunds of over $1 billion dollars and many of the unclaimed refunds belong to people who don’t file and may be eligible for unclaimed refunds.

Even if you don’t have to file taxes, you may be able to file and claim refundable tax credits. If your income is below the filing threshold, consider filing your taxes anyway to claim any tax credits and refund that may be owed to you.

No matter what moves you made last year, TurboTax will make them count on your taxes. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund – guaranteed.