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

Posted By Jim On 07/28/2009 @ 12:34 pm In Personal Finance | 12 Comments

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:

  • Let’s say you owe $500 in taxes before looking at any of your tax credits. Boo!
  • You find that you are entitled to a tax credit of $1,000. Yay!
    • If the tax credit is refundable, then the government would send you a $500 check. You owe $500, you have a refundable $1000 credit, so you are entitled to the difference.
    • If the tax credit non-refundable, then you get nothing. You owe $500, you have a non-refundable $1000 credit, but since it’s non-refundable, you don’t get the difference.

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?


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[1] Tweet: http://twitter.com/share

[2] Email: mailto:?subject=http://www.bargaineering.com/articles/refundable-tax-credits-vs-non-refundable-tax-credits.html

[3] difference between a tax credit and a tax deduction: http://www.bargaineering.com/articles/tax-credit-vs-tax-deduction.html

[4] Additional Child Tax Credit: http://www.irs.gov/publications/p972/ar02.html#en_US_publink100012090

[5] Earned Income Credit: http://www.irs.gov/taxtopics/tc601.html

[6] Excess Social Security and RRTA Tax Withheld Credit: http://www.irs.gov/taxtopics/tc608.html

[7] First-time Homebuyer credit: http://www.irs.gov/taxtopics/tc611.html

[8] Health Coverage Tax Credit: http://www.irs.gov/individuals/article/0,,id=109915,00.html

[9] hot topic during the 2008 Presidential campaign: http://online.wsj.com/article/SB122454768040352279.html

Thank you for reading!