The term “refundable credit” refers to a tax credit that can produce a tax refund even if your tax liability is $0. Contrast this with “nonrefundable credits,” which can reduce your tax liability to $0 but don’t generate a refund by themselves.

Examples of refundable credits include: income tax withheld from your wages; estimated tax payments you made during the year; the Earned Income Credit; the additional child tax credit; and part of the American Opportunity Credit for college expenses.

Non-refundable credits include things such as the credit for daycare expenses; the retirement savers credit; part of the American Opportunity Credit; the Lifetime Learning Credit; and the child tax credit.

Example:

Your tax liability is $500. You qualify for a daycare-expense credit of $750. This credit is non-refundable, so you can only use $500 of the credit to bring your tax liability down to $0. Let’s say instead that you qualify for a $750 Earned Income Credit. This credit is fully refundable, so you could claim the credit in full and gt a refund of $250.

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