Monday, May 18, 2009

What Makes A Tax Credit "Refundable"?


Every tax credit that is introduced is either refundable, partially refundable or non-refundable. What does "refundable" mean?

A refundable credit is a tax credit that can reduce the amount of tax you owe to less than zero. In other words, it can result in a refund where there was not one to begin with. As an example, the newly created $8000 first-time homebuyers tax credit is refundable. If your federal income tax bill without this credit is $6,000, and you qualify for the credit, $8,000 would be deducted from the amount you owe. You would end up with a $2,000 refund.

A non-refundable credit cannot reduce your tax bill to less than zero. The Hope and Lifetime Learning credits are good examples of this. For instance if your tax bill is $1,000 and you qualify for a $1,800 Hope Credit, your tax bill would be reduced to $0 and you would not owe any taxes, but you would not get a refund.

Some tax credits are partially refundable, such as the child tax credit. Taxpayers with income below a certain threshhold receive a larger refundable portion of the credit than those above the threshold.

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