What is Refundable vs. Nonrefundable Credits?
Definition A tax credit reduces your tax dollar for dollar, but how far it can go depends on its type. A nonrefundable credit can reduce your tax only to zero, with any excess lost or sometimes carried forward, while a refundable credit can reduce your tax below zero and be paid to you as a refund. Examples of refundable credits include the earned income credit and the refundable portion of the child tax credit.
The distinction determines whether a credit actually puts money in a client's pocket, which matters most for lower-income filers with little tax to offset.