How a nonrefundable tax credit works
Say you owe $500 in federal tax and qualify for a $700 nonrefundable credit. The credit wipes out your $500 bill, bringing it to $0. But the remaining $200 ($700 − $500) isn’t refunded. It’s forfeited. A nonrefundable credit can zero out your tax, but it can never turn into a payment from the IRS.
Nonrefundable vs. refundable tax credits
| Feature | Nonrefundable credit | Refundable credit |
|---|---|---|
| Can reduce tax owed to $0 | Yes | Yes |
| Can generate a refund beyond what you paid in | No | Yes |
| Unused amount | Forfeited (unless it allows carryforward) | Paid out in full |
| Examples | Lifetime Learning Credit, Saver’s Credit, Foreign Tax Credit | Earned Income Tax Credit, Additional Child Tax Credit |
Source: Internal Revenue Service
Common nonrefundable tax credits
Several well-known federal credits are nonrefundable:
- Child Tax Credit (CTC): up to its nonrefundable portion. A separate refundable piece, the Additional Child Tax Credit (ACTC), covers part of the rest for eligible filers.
- Lifetime Learning Credit: worth 20% of the first $10,000 in qualified education expenses, up to $2,000 per return.
- Saver’s Credit: for retirement account contributions, capped based on filing status and adjusted gross income (AGI).
- Foreign tax credit: for income taxes already paid to another country.
- Adoption credit: for qualified adoption expenses.
Carrying a nonrefundable credit forward
Whether you can carry forward the unused amount of a nonrefundable tax credit depends on the specific credit. For example, the foreign tax credit can be carried back one year or forward up to 10 years, and the adoption credit can be carried forward up to five years.
Others simply expire. For example, if you don’t use the full Saver’s Credit or Lifetime Learning Credit in the year you claim it, the unused portion is lost.
Where to claim nonrefundable credits on your return
Nonrefundable credits are reported on Schedule 3 (Form 1040), Part I, which flows to your Form 1040. Refundable credits and other payments go on Part II, and most credits also require their own supporting form (for example, the Lifetime Learning Credit needs Form 8863). It’s important to always check the instructions for the specific nonrefundable credit on Schedule 3 before you file.
