8563 / How does a nonrefundable tax credit work and what are some examples?

Editor’s Note: Many of the credits listed below contain sunset provisions so that they apply only so long as Congress chooses to renew them from year to year. Recently, Congress has extended various credits through the Protecting Americans from Tax Hikes Act of 2015 (PATH), the Bipartisan Budget Act of 2018 (BBA 2018) and the Tax Certainty and Disaster Relief Act of 2020. See below for more details. As of the date of this revision and with respect to provisions that were not made permanent, Congress has not indicated whether it will extend this treatment for future years.

A nonrefundable credit is a credit that is limited by the amount of the taxpayer’s tax liability for the year. A taxpayer is only entitled to claim nonrefundable tax credits to the extent that the combined amount of the credits does not exceed total income tax liability for the tax year. So, unlike refundable credits ( Q 8553), a nonrefundable credit can never result in a refund or credit.

However, because certain nonrefundable credits in excess of a taxpayer’s tax liability for a tax year may be carried forward into future tax years (and others cannot be carried over), it is important to consider the order in which a taxpayer claims the nonrefundable credits.¹

The following tax credits are classified as nonrefundable credits:

…Personal credits which consist of the child and dependent care credit;² the credit for the elderly and the permanently and totally disabled,³ the qualified adoption credit,⁴ the nonrefundable portion of the child tax credit,⁵ the American Opportunity (the increased limits were made permanent by PATH), Hope Scholarship, and Lifetime Learning credits,⁶ the credit for elective deferrals and IRA contributions (the “saver’s credit,” which became permanent under PPA 2006);⁷