A nonrefundable tax credit can lower what you owe to the IRS, sometimes substantially but only to a point. Unlike refundable credits, nonrefundable credits cannot generate a refund if the credit amount exceeds your tax liability. That means if your total tax due is zero, the credit cannot push you into a negative balance and result in a refund. If you owe the IRS money, this is what you need to know about nonrefundable tax credits.
A financial advisor can help you maximize your return by identifying which nonrefundable credits are relevant to your financial situation.
What Is the Nonrefundable Tax Credit?
A nonrefundable tax credit is a dollar-for-dollar reduction in the amount of federal income tax you owe. However, it only works up to the amount of your total tax liability. If your tax owed is less than the credit amount, you lose the excess portion because you will not receive a refund for the unused balance.
For example, If your tax bill is $800 and you qualify for a $1,200 nonrefundable credit, you can only use $800 of that credit. The remaining $400 does not carry over and will not increase your refund.
Nonrefundable credits are often structured to benefit taxpayers who have moderate to high income levels. They are often a group that consistently owe taxes and can take full advantage of the tax credit’s value.
Examples of Nonrefundable Tax Credits
Several common nonrefundable tax credits are available to individuals and families, depending on their financial and personal circumstances:
- Child and dependent care credit: For taxpayers who pay for child care or dependent care in order to work or look for work.
- Lifetime learning credit: Available for qualified tuition and related expenses but capped at $2,000 per return.
- Saver’s credit: Offers a credit for low- to moderate-income taxpayers contributing to retirement accounts.
- Foreign tax credit: Helps offset taxes paid to a foreign government on income that is also taxed in the U.S.
- Adoption credit: Covers qualified adoption expenses, subject to income limits and credit caps.
Nonrefundable Tax Credit Eligibility
Eligibility for a nonrefundable tax credit depends on the type of credit and your financial profile. However, there are some common factors that affect eligibility.
- Income limits: Many nonrefundable credits phase out at higher income levels. For example, the Lifetime Learning Credit begins to phase out for single filers with modified adjusted gross income (MAGI) over $80,000 in 2025.
- Filing status: Some credits are limited to certain filing statuses (e.g., head of household, married filing jointly).
- Qualifying expenses: To claim credits like the Child and Dependent Care Credit or Lifetime Learning Credit, you must have paid eligible expenses and maintain documentation.
- Age or dependent criteria: Some credits require that you support qualifying dependents or meet certain age thresholds.
What Are the Benefits of the Nonrefundable Tax Credit?
While nonrefundable credits do not provide a refund if they exceed your tax liability, they still offer several key advantages:
- Direct reduction in taxes owed: Nonrefundable credits reduce your tax bill dollar for dollar. If you owe $3,000 in federal taxes and claim a $1,000 nonrefundable credit, your bill drops to $2,000.
- Encouragement of positive financial behavior: Many nonrefundable credits reward long-term financial planning, such as saving for retirement or investing in education.
- Stability in planning: Since these credits apply to taxpayers with consistent liability, they can often be factored into annual planning strategies, allowing high-income earners to project their taxes with more accuracy.
- Refundable credits: In many cases, nonrefundable credits can be used in combination with refundable ones to minimize your tax bill and maximize any potential refund.
How to Claim a Nonrefundable Tax Credit
There are a few steps to follow if you want to claim a nonrefundable tax credit.
Step 1: Determine Eligibility
Confirm that you meet the credit’s requirements regarding income, expenses and filing status. This information is often available in IRS publications or through tax software.
Step 2: Complete the Appropriate IRS Form
Each credit has its own associated form:
Step 3: Retain Documentation
Keep receipts and records for any expenses tied to the credit. This is especially important for education, adoption and dependent care credits.
Step 4: File Your Tax Return
Make sure to attach the relevant forms and schedules, or, if using tax software, double-check your input for the correct information. Double-check that you have not claimed more than your tax liability allows for nonrefundable credits.
Bottom Line
A nonrefundable tax credit is a powerful tool for reducing your federal tax bill, but it works only up to the amount of tax you owe. Unlike refundable credits, these will not generate a refund if your tax liability is already zero. Still, for many taxpayers, nonrefundable credits can lead to meaningful savings, especially when paired with careful planning and documentation.
Tax Planning Tips
- If you are looking for ways to lower your tax liability, a financial advisor who specializes in tax planning can help optimize your finances. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to know how much your next tax refund or balance could be, SmartAsset’s tax return calculator can help you get an estimate.
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