A nonrefundable tax credit can lower what you owe to the IRS, sometimes substantially but only to a point. Unlike refundable credits, nonrefundable credits cannot generate a refund if the credit amount exceeds your tax liability. That means if your total tax due is zero, the credit cannot push you into a negative balance and result in a refund. If you owe the IRS money, this is what you need to know about nonrefundable tax credits.
A financial advisor can help you maximize your return by identifying which nonrefundable credits are relevant to your financial situation.
What Is the Nonrefundable Tax Credit?
A nonrefundable tax credit is a dollar-for-dollar reduction in the amount of federal income tax you owe. However, it only works up to the amount of your total tax liability. If your tax owed is less than the credit amount, you lose the excess portion because you will not receive a refund for the unused balance.
For example, If your tax bill is $800 and you qualify for a $1,200 nonrefundable credit, you can only use $800 of that credit. The remaining $400 does not carry over and will not increase your refund.
Nonrefundable credits are often structured to benefit taxpayers who have moderate to high income levels. They are often a group that consistently owe taxes and can take full advantage of the tax credit’s value.
Examples of Nonrefundable Tax Credits
Several common nonrefundable tax credits are available to individuals and families, depending on their financial and personal circumstances:
- Child and dependent care credit: For taxpayers who pay for child care or dependent care in order to work or look for work.
- Lifetime learning credit: Available for qualified tuition and related expenses but capped at $2,000 per return.
- Saver’s credit: Offers a credit for low- to moderate-income taxpayers contributing to retirement accounts.
- Foreign tax credit: Helps offset taxes paid to a foreign government on income that is also taxed in the U.S.
- Adoption credit: Covers qualified adoption expenses, subject to income limits and credit caps.
Eligibility for a nonrefundable tax credit depends on the type of credit and your financial profile. However, there are some common factors that affect eligibility. While nonrefundable credits do not provide a refund if they exceed your tax liability, they still offer several key advantages: There are a few steps to follow if you want to claim a nonrefundable tax credit. Confirm that you meet the credit’s requirements regarding income, expenses and filing status. This information is often available in IRS publications or through tax software. Each credit has its own associated form: Keep receipts and records for any expenses tied to the credit. This is especially important for education, adoption and dependent care credits. Make sure to attach the relevant forms and schedules, or, if using tax software, double-check your input for the correct information. Double-check that you have not claimed more than your tax liability allows for nonrefundable credits. A nonrefundable tax credit is a powerful tool for reducing your federal tax bill, but it works only up to the amount of tax you owe. Unlike refundable credits, these will not generate a refund if your tax liability is already zero. Still, for many taxpayers, nonrefundable credits can lead to meaningful savings, especially when paired with careful planning and documentation. Photo credit: ©iStock.com/VioletaStoimenova, ©iStock.com/RgStudio, ©iStock.com/courtneyk Read the full article hereNonrefundable Tax Credit Eligibility
What Are the Benefits of the Nonrefundable Tax Credit?
How to Claim a Nonrefundable Tax Credit
Step 1: Determine Eligibility
Step 2: Complete the Appropriate IRS Form
Step 3: Retain Documentation
Step 4: File Your Tax Return
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