As you learn more about tax credits you may hear that one credit is “refundable” and another credit is “nonrefundable”. You might be asking yourself, what is the difference?
A refundable credit is a tax credit that can return cash to you even if you do not owe any money on your tax return. The reason we call the money the IRS sends us our tax refund is because it is money that the government has that should be returned (refunded) to you.
So a refundable tax credit is a credit that increases the size of your tax refund meaning more money in your pocket. Two of the biggest refundable credits are the Child Tax Credit and the Earned Income Credit. Even if you did not earn a lot of money this year, these refundable tax credits can help support you and give your family the cash you need to pay for your expenses.
In contrast, a nonrefundable credit is a tax credit that reduces the amount of taxes you owe. If you do not owe any money it does not directly benefit you. If you would have owed taxes but they were covered by your withholdings from your job, a nonrefundable credit may allow you to get that money back. These credits also make sure that your refundable tax credits like the Child Tax Credit and Earned Income Credits are not used to pay for your taxes but are fully sent back to you as a refund.