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Tax Credits and Key Non-Refundable Credits

Chris Test January 6, 2021

Non-Refundable vs. Refundable Tax Credits

Tax credits exist to help reduce a taxpayer’s amount of taxes owed based on a variety of factors, including household members, income level, and certain qualified expenses. Tax credits may either be refundable or non-refundable.

Non-Refundable tax credits help reduce a taxpayer’s tax liability, or total taxes owed, to zero. For example, if a taxpayer qualifies for a $1,000 non-refundable credit, but only owes $600 in taxes, they will receive $600 of the credit and their tax owed will be reduced to zero. However, some tax credits have both a non-refundable and refundable portion.

Non-Refundable Credits only apply to income taxes.

While non-refundable credits help reduce taxes owed based on income, taxpayers may be subject to additional taxes after factoring in non-refundable credits. These “Other taxes,” are added to the return after factoring in non-refundable credits.

Refundable taxes reduce tax credits to zero, and the remainder may be claimed as a refund. For example, if a taxpayer qualifies for a $1,000 refundable credit and owes $600 in taxes, their tax bill will be reduced to zero and they will be eligible to receive the remaining $400 as a refund.

Non-Refundable Credits

The most common non-refundable credits you will see at VITA sites include:

  • Child Tax Credit*
  • Credit for Other Dependents
  • Child and Dependent Care Credits
  • Education Credits
    • Lifetime Learning
    • American Opportunity Credit*
  • Residential Energy Credit

*These tax credits have a refundable portion available for taxpayers if they are eligible and do not use the full non-refundable credit.

Child Tax Credit
  • The Child Tax Credit provides a $2,000 credit to taxpayers with qualifying children. The child in question must:
    • Meet the same qualifications as a qualifying child dependent (a qualifying relative will not qualify for this credit).
    • Be under the age of 17
    • Must have a valid Social Security Number for employment
  • A taxpayer can claim the Child Tax Credit if they can and do claim a dependency exemption for the child
  • A taxpayer may receive the credit for each eligible dependent on the return, with a maximum value of $6,000.
  • If a taxpayer maxes out their tax liability, they may be able to claim a remainder of the Child Tax Credit as the (refundable) Additional Child Tax Credit.
Credit for Other Dependents
  • Non-refundable credit up to $500 per qualifying dependent
  • Dependents who do not qualify for the Child Tax Credit may be eligible for the Credit for Other Dependents, this includes:
    • Qualifying child dependents over the age of 17
    • Qualifying relative dependents regardless of age that has a valid ID (ATIN, ITIN, SSN).
Child and Dependent Care Credit
  • Credit valued on the number of qualified expenses paid for childcare for an eligible individual and to and eligible child care provider
  • Childcare expenses must have occurred when the taxpayer was working, looking for work, or a full-time student
  • An eligible individual must:
    • Be under age 13 when the expenses were incurred
    • Be an individual incapable of self-care that the taxpayer can claim as a dependent
    • A spouse who was physically incapable of self-care
  • Qualifying expenses include:
    • Expenses for daycare (Pre-K and under) or after school care
    • Expenses for a summer day camp
  • Non-qualifying expenses include:
    • Expenses to an overnight camp
    • Expenses to attend kindergarten or a higher grade
Education Credits

There are two main types of education credits, the Lifetime Learning Credit (Non-Refundable) and the American Opportunity Credit (Non-Refundable and Refundable). For now, we will focus on the Lifetime Learning Credit.

Lifetime Learning Credit
  • The Lifetime Learning Credit is a non-refundable tax credit based on qualifying tuition expenses
  • Individuals do not have to be in a degree program to qualify
  • Available to individuals who have been in school for more than four years.
Retirement Savings Credit
  • Non-Refundable Credit available to those who make independent contributions to a retirement account
  • Most taxpayers will make their contribution through their employer, and qualifying contributions will pull through from the W-2
    • Based on Box 12 codes
Residential Energy Credit (Non-Business)

The nonbusiness energy property credit is available for certain qualifying energy efficiency improvements or
residential energy property costs. The qualifying items are:

  • Biomass stoves
  • • Heating, ventilating, air-conditioning (HVAC)
  • • Insulation
  • • Roofs (metal and asphalt)
  • • Water heaters (non-solar)
  • • Windows and doors
  • The nonbusiness energy property credit is subject to the following limitations:
    • •The total combined credit limit for all tax years after 2005 is $500, and the combined credit limit for windows is $200.
    • •The maximum credit for residential energy property costs is $50 for any advanced main air circulating fan; $150 for any qualified natural gas, propane, or oil furnace, or hot water boiler; and $300 for any site of energy efficient building property.
  • It is important to note that:
    • The credit is only available for existing homes that are the taxpayer’s main home – new construction and rentals do not qualify. The taxpayer must own the home to qualify.
    • Amounts provided by subsidized federal, state, or local energy financing do not qualify for the credit.