Non-Refundable vs Refundable Tax Credits: What’s the Difference?

Tax credits and deductions are important because they reduce your tax liability. The IRS describes a tax credit as a "dollar-for-dollar" amount that taxpayers claim on their tax returns to reduce the income tax they owe.  When you're eligible for certain tax credits, you can use them to lower your tax bill. 

However, not all tax credits are created equal. Here's what you need to know.

How do tax credits work?

There are a lot of different tax credits, and the amounts of those credits can vary by year (e.g. If the credit is adjusted for inflation). For example, there are tax credits for homeowners, education tax credits, tax credits for electric vehicles, and a range of family and dependent care tax credits. (More on some of those below.)

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• Sometimes, tax credits reduce your tax owed to a negative amount.
• In some cases, if a tax credit is refundable, some or all of the credit is sent to the taxpayer as a tax refund. 
• Non-refundable tax credits aren't issued as refunds. 

Both refundable and non-refundable credits can result in lower tax bills and contribute to refund amounts. 

Refundable tax credits

A fully refundable tax credit may result in the person who claims it receiving some or all of the credit as a tax refund. If the amount of the credit lowers your tax bill to zero, the IRS applies the remaining portion of a fully refundable credit to your tax refund. 

For example, if your tax liability is $400, and you claim a refundable credit worth $2,000, you would receive a tax refund of $1,600.

Some tax credits are partially refundable, which means you may receive only part of the credit as a tax refund, even if your tax liability is zero. 

For example, the American Opportunity Tax Credit (AOTC) is worth up to $2,500, but only $1,000 of this education tax credit is refundable. So, if your tax bill is zero before the AOTC is applied, you would receive a $1,000 tax refund rather than a $2,500 refund.

Refundable tax credits 2023

Here are a few of the federal tax credits that could potentially result in a tax refund for the 2023 tax year (for taxes filed in 2024):

• Earned Income Tax Credit (EITC). The EITC is a refundable tax credit for taxpayers with low and moderate incomes. This is a refundable tax credit, which means you could receive the amount of the credit as a tax refund if you qualify. Claiming the EITC requires that you have earned income (such as from wages, business income, investments, etc.). Additionally, your income cannot exceed the thresholds set for the tax year. 
• American Opportunity Tax Credit (AOTC). As mentioned above, the AOTC is a partially refundable tax credit for qualified education expenses that are paid by an eligible student for the first four years of higher education. The maximum annual credit amount for the AOTC is $2,500 per eligible student. Income limits apply for the full credit. So, your income must be $80,000 or less ($160,000 if married filing jointly). The credit is phased out if your income is over 490,000 ($180,000 for joint filers).

Is CTC refundable?

Claiming the child tax credit (CTC) can lower your tax liability or increase your refund. The 2023 child tax credit is worth up to $2,000. Of that amount $1,600 is refundable. 

Some people call the refundable portion of the CTC the "additional child tax credit." As with any tax credit, there are rules for who can claim the CTC.

What about state tax credits? Some states also offer refundable tax credits that might result in a state tax refund, and the number of families that qualify grew last year. 

For example, several states have implemented or expanded child tax credits that apply for the 2023 tax year.  Due to numerous state tax changes for 2024 (returns filed in 2025), several states have also expanded EITC credits.

What are non-refundable tax credits? 

A non-refundable tax credit is a credit that can lower your tax bill, sometimes to zero. However, with a non-refundable tax credit, you won’t receive the credit back as a refund, even if it exceeds your tax liability. 

For example, if your tax liability is $500, and you claim a non-refundable credit worth $1,000, you won’t get a tax refund. But you wouldn’t owe anything, either.

Although non-refundable credits don’t directly result in a tax refund, they can contribute to how high of a refund you receive (if you also claim refundable credits). That’s because you must have a $0 tax liability before any refundable credits can be applied to your refund. 

Related

• Who Will Get an Expanded Child Tax Credit This Year?
• Best States for Middle-class Families Who Hate Paying Taxes
• Can the Earned Income Tax Credit Help You?