Tax Resources

Federal Tax Credits

There are two types of federal tax credits; non refundable tax credit and refundable tax credits. In claiming tax credits, you should know the differences and understand how each federal tax credit works.

What is the difference between a tax deduction and a tax credit?

A tax deduction reduces taxable income whereas a federal tax credit is a dollar-for-dollar reduction of the tax amount owed to the IRS. Federal tax credit is the reason why someone who never had any taxes withheld or paid taxes may get federal tax refunds from the IRS.

Understanding federal tax credits
What are nonrefundable tax credits?

Nonrefundable tax credits are amounts that are subtracted directly from the taxes owed. Therefore, a nonrefundable tax credit can never be more than the tax itself. In another word, you cannot receive a federal tax refund for the excess of nonrefundable tax credit and the actual tax owed to the IRS.

Examples of nonrefundable tax credits

  • child and independent care tax credit
  • child tax credit
  • Hope and Lifetime learning tax credits
  • retirement savings contributions tax credit
  • energy tax credits
What are refundable tax credits?

Refundable tax credits are amounts added to the federal income tax withheld (if there is any) on your income tax return so that if the total amount is more than the tax owed to the IRS, the excess will be refunded. While nonrefundable tax credits cannot be more than the tax owed, refundable tax credits can.

Examples of refundable tax credits

  • earning income credit
  • additional child tax credit

Tax Questions