- Bargaineering - http://www.bargaineering.com/articles -

What Are Refundable Tax Credits vs. Non-Refundable Tax Credits?

Last year, I wrote about the difference between a tax credit and a tax deduction [3]. Like marginal tax rates [3], it’s a tax topic that is often misunderstood because, well, our tax code is confusing!

Today, I want to talk about refundable tax credits vs. non-refundable tax credits, because it’s been in the news a lot lately after the big stimulus bill was passed. If you’re unsure what the difference is between a tax credit and a tax deduction, I invite you to review my article from 2008.

A tax credit can be refundable or non-refundable.

To better explain the difference, I’ll have to start with an example:

That’s why refundable tax credits are so awesome… unfortunately, there aren’t very many refundable tax credits. In fact, as of this writing there are only five – the Additional Child Tax Credit [4], the Earned Income Credit [5], the Excess Social Security and RRTA Tax Withheld Credit [6], the First-time Homebuyer credit [7], and the Health Coverage Tax Credit [8]. Every other credit is non-refundable.

It was a hot topic during the 2008 Presidential campaign [9] as the party nominees battled each other over how socialist each candidates’ tax plans were. One of the most interesting statistics I learned from that period was that an estimated 37.8% of tax filers in 2009 would pay zero or negative tax!

Amazing huh?