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Tax Credits for Individuals

  1. Child Tax Credit
  2. EITC
  3. Form 5405
  4. Foreign Tax Credit
  5. IRS Publication 970
  6. Publication 972
  7. Form 1095-A
  8. ACTC
  9. Bush Tax Cuts
  10. Hope Credit
  11. Non-Refundable Tax Credit
  12. Tax Credit

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Non-Refundable Tax Credit: Definition & Overview

Updated: November 25, 2022

Everyone has different circumstances when it comes to how much tax they need to pay to the government. A lot of it depends on individual tax brackets and how much you earn each year. Yet, there is still a range of tax credits that you might be eligible for.

There can be a lot to know and understanding all the specific details can sometimes be confusing. Are some tax credits refundable and are some non-refundable? How do these work? In this guide, we’re going to break down how non-refundable tax credits work. Continue reading to learn all about them, including the different types, some examples, and more. 

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    KEY TAKEAWAYS

    • A non-refundable tax credit is a certain type of tax break an individual can get on their income. It helps lower the overall tax liability. 
    • Non-refundable tax credits are only able to reduce a tax liability to zero.
    • If a non-refundable credit exceeds its tax liability it will not generate a tax refund. A refundable tax credit, on the other hand, will provide a refund. 
    • Some common examples of non-refundable trade credits include the saver’s credit and the foreign tax credit.

    What Is a Non-Refundable Tax Credit?

    Non-refundable tax credits are a type of credit that gets applied to certain tax deductions. The credit can only reduce a taxpayer’s total liability to zero. Basically, a non-refundable tax credit cannot get refunded to the taxpayer or go below zero. 

    Any amount that happens to fall below zero ultimately ends up getting forfeited. It works in the opposite way to refundable tax credits. In the case of refundable tax credits, they are fully refunded back to the taxpayer even if they have a tax liability less than zero.

    Taxpayers often receive more benefits through refundable tax credits compared to nonrefundable tax credits. However, it can depend on certain itemized deductions and taxable income.

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    What Are the Types of Non-Refundable Tax Credits?

    There are a few non-refundable tax credits that allow taxpayers to carry unused amounts backward or forward. These can include the foreign tax credit (FTC) and the general business credit (GBC). However, certain carryover rules apply and it can depend on the specific type of credit. 

    Here are some of the most common examples of tax credits:

    • Alternative motor vehicle credit
    • General business credit (GBC)
    • Residential energy efficient property credit 
    • Credit for holders of tax credit bonds 
    • Adoption tax credit 
    • Foreign tax credit (FTC)
    • Savers credit
    • Lifetime learning credit (LLC)
    • Premium tax credit
    • Federal business credit 
    • Efficient Property Tax Credit 
    • Franchise tax credit 
    • Renewable energy tax credit 
    • And other additional tax credits

    How Do Non-Refundable Tax Credits Work?

    There are various types of tax breaks that the U.S. tax code outlines. These breaks come in the form of tax credits and they’re intended to help reduce a taxpayer’s actual taxes. Tax credits are applied to the overall amount of tax an individual owes once additional deductions get made from income taxes. It’s also worth highlighting that a tax credit will end up reducing the tax bill dollar-for-dollar. 

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    Refundable Tax Credits vs. Non-Refundable Tax Credits 

    Tax credits come in two different forms and are based on your marginal tax rate: refundable and non-refundable tax credits. When you receive a refundable tax credit, you will often receive it in the form of a refund check. However, this only happens if the tax credit ends up being more than your total tax liability. 

    On the flip side, non-refundable tax credits don’t provide you with any form of refund. This is because the tax credit reduces the amount of tax that’s owed to zero. Common refundable tax credits include the child tax credit and the income tax credit. 

    Example of Non-Refundable Tax Credits 

    Consider a scenario in which a person earns $5,000 from a job and $1,000 from a rental home as additional income. The person is eligible for non-refundable tax credits of $500 and tax deductions of $500. Additionally, a 25% marginal tax rate applies to them.

    This would make their taxable income $5,875

    To find out their tax payable, you’d take their taxable income and subtract their credits. This would leave you with $5,375.

    However, if their tax credit was $6,000, then this would cover their entire tax obligation. Therefore leaving them with a tax bill of $0.

    Summary

    Non-refundable tax credits are credits that a taxpayer can receive and use towards taxes payable. However, the credits can only reduce the taxpayer’s total liability to a minimum of zero. Basically, anything below zero cannot be refunded back to the taxpayer and it doesn’t matter how many sources of income there are. 

    Some of the most common types of non-refundable tax credits include the foreign tax credit (FTC) and the general business credit (GBC). Non-refundable tax credits work in the opposite way of a refundable tax credit. With refundable tax credits, the taxpayer will receive a full refund of the additional credit amount.

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    FAQs About Non-Refundable Tax Credits

    What Is the Purpose of Non-Refundable Tax Credits?

    Non-refundable tax credits are designed so that they can’t get used to create a tax refund or increase your tax refund if you wouldn’t have had one otherwise. It means that you can’t exceed the total amount of tax that you owe.

    Who Can Claim a Non-Refundable Tax Credit?

    Anyone who is eligible for a non-refundable tax credit can claim one. There are certain rules surrounding charitable contributions and unused tax credits. Speak to a tax professional to find out the most accurate information for your personal situation and credit claims. 

    What Are the Non-Refundable Tax Credits for 2022?

    Examples of non-refundable tax credits in 2022 include the child and dependent care credit (CDCTC), the lifetime learning credit, the federal adoption credit, the saver’s credit, and the residential energy credit.

    What Is a Tax Credit Certificate Number?

    A tax credit certificate outlines the details for your tax year. It will cover federal taxes, retirement contributions, a potential tax refund, and how to claim for a refund. The specific number helps identify current income tax rates using a standardized deduction method.

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