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 tax 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 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 remaining 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 1a 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 1