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Non-Refundable Tax Credit


A non-refundable tax credit is a type of tax credit that can reduce a taxpayer’s liability to zero, but any excess amount from the credit cannot be refunded to the taxpayer. Essentially, it allows taxpayers to subtract the amount of the credit they’ve earned from the total amount of taxes they owe to the government. If the tax credit is larger than their total tax owed, they will still owe nothing, but they won’t get any money back.


Non-Refundable Tax Credit is phonetically pronounced as: Non – /nɒn/Refundable – /rɪˈfʌndəbəl/Tax – /tæks/Credit – /ˈkrɛdɪt/

Key Takeaways

<ol><li>Non-Refundable Tax Credits Serve to Reduce Tax Liability – The main purpose of non-refundable tax credits is to reduce a taxpayer’s liability. However, unlike refundable tax credits, they won’t provide a refund for taxpayers who owe less than their available credits.</li><li>Variety of Available Non-Refundable Tax Credits – There are several types of non-refundable credits available to taxpayers, such as Child and Dependent Care Credit, the Foreign Tax Credit, and the Lifetime Learning Credit. The eligibility requirements and amounts for these credits can vary, so taxpayers should familiarize themselves with these details.</li><li>Limitations of Non-Refundable Tax Credits – Although these tax credits can decrease the amount of tax you owe to zero, they cannot result in a refund. If your tax liability is less than your non-refundable tax credits, the remainder of the credit is not refunded back to you, so one has to plan accordingly.</li></ol>


A Non-Refundable Tax Credit is a key term in business and finance as it directly impacts an individual’s or a company’s tax payment structure. This type of credit reduces the taxable income and thus, the amount of tax owed. It is ‘non-refundable’ because it can only decrease a taxpayer’s liability to zero, unlike refundable credits that can potentially generate a refund greater than the tax owed. Therefore, its importance lies in its potential to significantly lower the taxes, thereby increasing after-tax income, which can redirect funds towards other areas of personal expenditure or business investment. However, its value can be fully utilized only if the taxpayer has sufficient tax liability to offset.


A non-refundable tax credit, as the name suggests, is a type of tax credit that is primarily designed to reduce a taxpayer’s taxable income, and therefore the amount of tax they owe to the government. They are essentially a rebate for specific types of expenses, aimed at encouraging certain behaviors or offsetting costs associated with them. For instance, many governments offer non-refundable tax credits for activities that produce social benefits, such as education, childcare, and adopting children. They serve to incentivize taxpayers to participate in these activities by decreasing their tax burden.Although non-refundable tax credits can reduce the amount of tax owed to zero, they will not result in a tax refund if the total of these credits is greater than the tax liability. In other words, they can only reduce a tax bill to zero and not provide the taxpayer with additional income. This contrasts with refundable tax credits, which can potentially lead to the government owing the taxpayer money. Overall, the primary purpose of non-refundable tax credits is to alleviate the tax burdens of individuals engaging in specific activities that are seen as beneficial to society, promote certain economic activities, or to provide relief for unavoidable costs.


1. Child Tax Credit: In many countries, including the United States, taxpayers can claim a non-refundable tax credit for each child they have under a certain age. This credit is directly deducted from their total tax liability. However, if the credit is higher than their total owe amount, the remaining difference will not be refunded to the taxpayer.2. Education Tax Credits: Both the American Opportunity Credit and the Lifetime Learning Credit are non-refundable education tax credits in the United States. They are applied toward the taxpayer’s liability, reducing their taxable amount. But if the tax owed amount is less than the total tax credits, the balance will not be refunded. 3. Foreign Tax Credit: Taxpayers who have paid or accrued certain types of tax to a foreign government can claim this non-refundable credit to avoid double taxation. If the tax owed in their own country is less than their foreign tax credit, the remaining balance is generally not refundable, but it may be carried forward to offset future tax liabilities.

Frequently Asked Questions(FAQ)

What is a Non-Refundable Tax Credit?

A Non-Refundable Tax Credit is a type of tax credit that can decrease a taxpayer’s liability to zero, but will not result in a refund or surplus if the credit is more than the total tax liability.

How does a Non-Refundable Tax Credit work?

Non-Refundable Tax Credits are subtracted from your income tax on a dollar-by-dollar basis. However, these credits cannot be used to create a tax refund over the amount you owe.

What are examples of Non-Refundable Tax Credits?

Examples of Non-Refundable Tax Credits include the Child and Dependent Care Credit, Foreign Tax Credit, and the Lifetime Learning Credit among others.

Can I carry forward unused Non-Refundable Tax Credits?

The ability to carry forward unused credits depends on the specific credit and tax laws. Some Non-Refundable Tax Credits allow unused credits to be carried forward to future years.

What is the difference between Refundable and Non-Refundable Tax Credits?

The main difference lies in what happens if your tax liability is less than your credits. With Refundable Tax Credits, if your credit exceeds your tax liability, the difference is refunded to you. With Non-Refundable Tax Credits, excess credits will not be refunded, rather, they will simply reduce your liability down to zero.

Are Non-Refundable Tax Credits beneficial?

Yes, they can be very beneficial in reducing your overall tax bill. They directly reduce the amount of tax you owe, potentially down to zero. However, their value is limited to the amount of tax you owe.

Who can claim Non-Refundable Tax Credits?

This largely depends on the specific credit’s criteria. Any taxpayer who is eligible according to the guidelines set for a specific non-refundable tax credit can claim it. It’s always advised to consult a tax professional for specific eligibility requirements.

How do I claim Non-Refundable Tax Credits?

Non-Refundable Tax Credits are claimed when you file your tax return. You generally need to fill out a specific form or schedule attached to your tax return. The form will depend on the specific credit. Your tax software or tax preparer can guide you through this process.

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