Tax Tip Tuesday: Tax Credits


What is a tax credit?

Tax credits are an amount of money that taxpayers can subtract from their tax bill. One dollar of tax credits equals one dollar subtracted from your bill for the current tax year. Tax credits are more favorable than tax deductions or exemptions because tax credits reduce tax liability dollar for dollar.

Individuals and business have certain kinds of tax credits depending on location, classifications, and industries.

Tax credits might be promoted to persuade action or change such as a credit for adding solar energy panels to a house to help boost greener energy. They also may be granted to help ease the burden on housing and other costs for lower-income taxpayers.

There are three basic types of tax credits: nonrefundable, refundable, and partially refundable.

Nonrefundable tax credits

A nonrefundable tax credit means that a taxpayer will not get a refund if the balance due for taxes zeros out. They can only help reduce the tax bill. The remaining part of a nonrefundable tax credit that can’t be utilized is lost.

Nonrefundable tax credits are only valid in the year of reporting. They expire after the return is filed and may not be carried over to future years.

Example of nonrefundable tax credits are:

  • Adoption
  • the Child and Dependent Care Credit
  • the Saver’s Tax Credit for funding retirement accounts
  • mortgage interest credit

Refundable tax credits

A refundable tax credit is when a taxpayer receives payment for the credit. This means that a taxpayer—regardless of their income or tax liability—is entitled to the entire amount of the credit. If the credit reduces the tax liability to below $0, the taxpayer will receive a refund.

Examples of refundable tax credits:

  • Earned income tax credit (EIC)
  • Premium tax credit

Partially refundable tax credits

If a tax credit is partially refundable that means it can both decrease taxable income and lower tax liability. If a taxpayer amount owed is reduced to $0 before using the entire credit amount, they may either take a refund of a certain percentage of the remaining amount or a fixed amount.

Examples of partially refundable tax credits:

  • The Child Tax Credit
  • American Opportunity Tax Credit (AOTC) for post-secondary education students

Verdant is a full-service accounting firm. set up a consultation with Verdant today. Your first meeting is always FREE and our licensed CPAs can help clear up your questions and concerns. 

Close Menu


No Rendering of Advice
The information contained within this website is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional accountant.

Presentation of the information via the Internet is not intended to create, and receipt does not constitute, an accountant-client relationship. Internet subscribers, users and online readers are advised not to act upon this information without seeking the service of a professional accountant.

Any U.S. federal tax advice contained in this website is not intended to be used for the purpose of avoiding penalties under U.S. federal tax law.

Accuracy of Information
While we use reasonable efforts to furnish accurate and up-to-date information, we do not warrant that any information contained in or made available through this website is accurate, complete, reliable, current or error-free. We assume no liability or responsibility for any errors or omissions in the content of this website or such If you wish to contact the webmaster of this website, please call CPA Websites Solutions at 802-655-1519.

Disclaimer of Warranties and Limitations of Liability
This website is provided on an “as is” and “as available” basis. Use of this website is at your own risk. We and our suppliers disclaim all warranties. Neither we nor our suppliers shall be liable for any damages of any kind with the use of this website.

Links To Third Party Websites
For your convenience, this website may contain hyperlinks to websites and servers maintained by third parties. We do not control, evaluate, endorse or guarantee content found in those sites. We do not assume any responsibility or liability for the actions, products, services and content of these sites or the parties that operate them. Your use of such sites is entirely at your own risk.

Privacy Policy

Here is our Privacy Policy required by the Gramm-Leach-Bliley Act of 1999.

We collect nonpublic personal information about you from the following sources:

  • Information we receive from you on applications, tax organizers, worksheets and other documents;

  • Information about your transactions with us, our affiliates, or others;

  • Information we receive from a consumer-reporting agency.

We do not disclose any nonpublic personal information about our clients or former clients to anyone, except as permitted by law.

We restrict access to nonpublic personal information about you to those members of our firm who need to know that information to provide services to you. We maintain physical, electronic, and procedural safeguards that comply with federal regulations to guard your nonpublic personal information.

Online information is stored on secure servers located in CPA Website Solutions SOC 1 certified data centers.

If you have any questions about this policy, please do not hesitate to contact us.