Definition:
A refundable credit is a tax credit that can result in money being distributed to a taxpayer even if there are no other taxes left for the credit to offset.
Normally, non-refundable credits may only be claimed to the extent that they offset or cancel out a tax liability owed to the government. A refundable credit allows the excess to be refunded to the taxpayer to be spent as they see fit.
There are only a few refundable credits under the current law:
- Earned Income Tax Credit (EITC)
- Additional Child Tax Credit
- First-Time Home Buyer Credit
- Health Coverage Tax Credit
In addition, there is speculation that President Obama will make the American Opportunity Tax Credit or the Hope Scholarship into a refundable credit.
Also Known As: refundable tax credit
Examples:
Jane owed $500 in taxes until she remembered she could claim $750 in a refundable tax credit. So, instead of owing money, she actually received $250 back from the government.