What Is a Nonrefundable Tax Credit?

A nonrefundable tax credit is a reduction in the amount of 澳洲幸运5官方开奖结果体彩网:income taxes that a taxpayer owes. It can redꦛuce the amount owed🧸 to zero, but no further. In other words, the taxpayer forfeits any credit that exceeds the total amount of taxes owed. 

By contrast, a 澳洲幸运5官方开奖结果体彩网:refundable tax credit results in a refund from the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS) if the credit reduces the taxpayer’s liability to a num꧒ber be🥃low zero.

Refundable and nonrefun༒dable tax credits are both directly subtracted from the amount of taxes that a taxpayer owes. Tax deductions, on the other hand, are subtracted from the taxpayer’s taxa💯ble income. Tax credits generally result in bigger savings, especially for lower-income filers.

How Nonrefundable Tax Credits Work

The U.S.ꦿ tax code provides certain tax breaks in the form of tax credits that reduce the tax liability of eligible taxpayers. A tax credit is applied to the amount of t൩ax owed by the taxpayer after all other allowable deductions are made from the person’s taxable income.

A tax credit reduces the total tax bill of an individual dollar for dollar.

Refundable Credits vs. Nonrefundable Credits

A tax credit can be either refundable or nonrefundable. A refundable tax credit usually results in a refund check if the tax credit is more than the ♑individual’s total tax liability.

For example, a taxpayer who applies a $3,400 refundable tax credit to a $3,000 tax bill will have the bill reduced to zero and the remain🧸in🎉g portion of the credit—$400—refunded to the taxpayer.

A nonrefundable tax credit does not result in a refund to the taxpayer,🉐 as it will only reduce the tax owed to zero.

Following the example above, if the $3,400 tax credit was nonrefundable, the individual will owe nothing to the government but will forfeit the $400 that remains unused after the credit is applied.

Tax Deductions vs. Tax Credits

A tax deduction reduces the income subject to tax, but a tax credit reduces the amount of taxes that are owed on a dollar-for-dollar basis.

Which is the better benefit depends on the taxpayer’s 澳洲幸运5官方开奖结果体彩网:marginal tax rate. If a taxpayer is entitled to a tax deduction of $100 and has a marginal tax rate of 30%, the deduction will save the taxpay♎er $30. If the same taxpayer is entitled to a tax credit of 50% of an expenditure of $100, the savings is 💧$50. However, if the same taxpayer claims a tax credit for 20% of $100, the savings is only $20.     

Examples of Nonrefundable Tax Credits

Commonܫly claimed tax credits that are nonrefundable include:

• Saver’s credit
• 澳洲幸运5官方开奖结果体彩网:Lifetime learning credit (LLC)
• 澳洲幸运5官方开奖结果体彩网:Adoption credit
• 澳洲幸运5官方开奖结果体彩网:Foreign tax credit (FTC)
• Mortgage interest tax credit
• Elderly or disabled credit
• Residential 澳洲幸运5官方开奖结果体彩网:energy efficient property credit
• 澳洲幸运5官方开奖结果体彩网:General business credit (GBC)
• 澳洲幸运5官方开奖结果体彩网:Alternative motor vehicle credit
• Credit for holders of tax credit bonds

Some nonrefundable tax credits, such as the general business credit (GBC) and foreign tax credit (FTC), allow taxpayers 🅘to carry any unused amounts backward to a prior year and forward to future tax years.

However, time limits apply to the carryover rules, and they differ depending on the specific credit. For example, while unused portions of the GBC may be carried forward up to 20 years, an individual can carry unused FTC amounts forward only up to 10 years.

Strategies for Maximizing Nonrefundable Credits

If a taxpayer has both refundable and nonrefundable tax credits, the benefits can be maximized 𒊎by applying the nonrefundable credits before claiming any refundable credits.

Nonrefundable tax credits should be used first to minimize the taxes owed. Only then should the refundable tax cred♏its be applied to reduce the tax liability even further to the point that the liability reaches zero. If any refundable credits are unused after the total tax liability is completely offset, the taxpayer will receive a refund check for the total amount of unusꦗed credits.

If the refundable credits were claimed first, there is a risk⛄ that all the refundable credits will be used to offset taxes due and any remaining nonrefundable credits will only reduce the tax owed to zero. The unused nonrefundable credits will not entitle the taxpayer to a refund.

ꦆ Low-income taxpayers often are unable to use the entire amount of their nonrefundable credits. Nonrefundable tax credits are valid only in the year when they are generated; 𒁏they expire if unused and may not be carried over to future years.

For the 2023 tax year, specific examples of nonrefundable tax credits include credits for adoption, credits for energy-efficient residential property, and the saver’s tax credit for funding retirement accounts.

The Bottom Line

Nonrefundable tax credits can reduce a taxpayer’s bill to zero, but no further. If the taxpayer owesꦗ less in taxes than the nonrefundable credit is worth, they don’t get reimbursed for the unused credit. The 🙈opposite is true of a refundable credit.

Taxpayers entitled to both types of credits should apply ﷽their nonrefundable credit🙈s first. Only then should they figure in refundable credits that could yield a refund.