On an individual tax return, there are 2 categories of credits: Non-refundable and Refundable. This page explains the difference between the 2 types and goes over specific credits that may be found on individual tax returns for VITA clients. Some of these credits are automatically generated by the system once all the clients' demographic information and income is entered, others need to be purposefully generated by selecting specific forms.

Non-Refundable Credits

Non-refundable credits can reduce your income tax liability (the amount of income tax you must pay for the year); however, it can only reduce your income tax liability to zero $0. In other words,  if you have an income tax liability of $2,254, then the most non-refundable credit you can get is $2,254.  You could get less or no credit, but you can't get more.

Examples of Non-Refundable Credits:

• Child Tax Credit 
• Credit for Other Dependents,
• Child Care Credit (only in TY2021 was a refundable credit),
• Education credit (Lifetime and non-refundable American Opportunity)
• Retirement Savings Credit
• Credit for Elderly & Disabled
• Residential energy credits
• Foreign Tax Credit
• and more

Non-Refundable Credits

Refundable Credits

Refundable credits are credits that are considered as payments you made--think of them as free money.  if you take your total tax liability and subtract ALL the payments you made (Federal tax you had withheld plus the non-refundable credits) anything that is left over is refunded to you!
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Examples of refundable credits:

• EITC (Earned Income Tax Credit) ,
• Refundable American Opportunity Education Credit,
• Additional Child Tax Credit,
• Marketplace Net premium tax credit
• Amount paid with request for extension to file
• and more

Prosperity Now did a great job summarizing Refundable Credits--click image to learn more.

My attempt to explain how Adjustments, Non-refundable, and Refundable Credits affect a return-For some it may make sense, for others it may confuse you---click image to open document-- this is just my playing around, take it for what it is-- an example.

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Helpful documents-- Is the IRS denying your client EITC or CTC credits for a dependent? Here are supporting document lists that can demonstrate the right to claim the credit. Remember to keep a copy of whatever you send to the IRS (they may ask for it again) Click images to get current PDF from IRS.gov . There are similar supporting documents lists on the filing status webpage to claim Head of Household status, and on the dependents page to claim someone as a dependent, and on the Education credit page for American Opportunity Credit  **Disregard the Year on the form--the IRS doesn't update them very often--just use the form as a guide--cross out the year.

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