Non-refundable tax credits A non-refundable credit basically means that the credit cannot be used to increase your tax refund or to create a tax refund when you haven't yet received it. In other words, your savings can't exceed the amount of taxes you owe. Sure, but this will depend on the amount of tax withholding you had during the year. Non-refundable credits only reduce the amount you owe in taxes and don't pay you money if that amount reaches zero.
However, if you don't have taxable income because of those credits and you paid taxes on a monthly basis by withholding from payroll, you'll likely receive some or all of that amount as a refund. Non-refundable credits cannot generate a refund on their own or be used to increase the amount you would otherwise receive. A non-refundable tax credit allows taxpayers to reduce their tax liability to zero, but not below zero. The child tax credit is non-refundable.
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. Tax credits can also be used to redistribute wealth and grant tax breaks to people with low incomes or disadvantaged. Only then should refundable tax credits be applied to further reduce the tax liability to the point where the obligation reaches zero.
Proponents of refundable credits argue that only by making the credits refundable can the tax code effectively carry out the desired social policy. Unlike tax deductions that reduce taxable income, a tax credit reduces the amount of taxes you owe, dollar for dollar. Some non-refundable tax credits, such as the General Business Credit (GBC) and the Foreign Tax Credit (FTC), allow taxpayers to transfer unused amounts to a previous year and carry them over to future tax years. Tax credits are generally better than deductions for the taxpayer, since they reduce the tax liability directly, while deductions reduce the taxes payable and are deducted depending on the taxpayer's tax bracket.
Generally, the taxpayer automatically loses the amount of a non-refundable credit that exceeds the taxpayer's liability. Remind students that the child tax credit is a non-refundable credit that allows eligible taxpayers to reduce their tax liability. On the other hand, a non-refundable tax credit does not entail a refund to the taxpayer, since it will only reduce the tax due to zero. Some of the most common types of non-refundable tax credits include the foreign tax credit (FTC) and the general trade credit (GBC).
Explain to students that they will use the information provided to calculate the child tax credit and the additional child tax credit for Scott Newberry. Whether a tax credit or tax deduction provides the greatest benefit to the taxpayer depends on the taxpayer's marginal tax rate. Income tax on all sources of income, domestic or foreign, the FTC offsets part of the foreign tax that has already been paid on the same income.
