Both refundable and non-refundable tax credits reduce your tax bill dollar for dollar. Non-refundable credits only apply to your tax liability, while refundable tax credits can eliminate your tax bill and refund the remaining credit. Taxpayers subtract refundable and non-refundable credits from the taxes they owe. If a refundable credit exceeds the amount of taxes due, the difference is paid as a refund.
If a non-refundable credit exceeds the amount of taxes due, the franchise is lost. Tax credits can lower your tax bill or give you a bigger refund, but not all tax credits are created the same way. Proponents of refundable credits argue that only by making the credits refundable can the tax code effectively carry out the desired social policy. Notable exceptions include the fully refundable earned income tax credit (EITC), the health insurance premium tax credit (PTC), the refundable portion of the child tax credit (CTC) known as the additional child tax credit (ACTC), and the partially refundable U.S.
Opportunity Tax Credit (AOTC) for higher education. In fact, refundable credits can generate a refund for the taxpayer, even if the taxpayer does not have a tax obligation (owes taxes). The federal budget distinguishes between the part of a tax credit that offsets the tax obligation and the part that is refundable, classifying the latter as an outlay. Non-refundable credits can only reduce the tax liability to zero (so that the taxpayer does not owe any taxes).
A refundable tax credit not only reduces the federal tax you owe, but it could also result in a refund if it's more than what you owe. Tax credits can lower your tax bill or give you a bigger refund, but not all tax credits are created equal. With the AOTC, if the credit fully offsets the taxes due, 40 percent of the rest can be paid as a refund. With the EITC, the PTC and the ACTC, taxpayers calculate the value of these credits and receive the credit first as compensation for the taxes due, and the rest is paid as a refund.
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