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Refundable Tax Credits

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Definition: A refundable tax credit is a tax credit that is treated as a payment and thus can be refunded to the taxpayer by the Internal Revenue Service. Refundable credits can be used strategically to help offset certain types of taxes that normally cannot be reduced, and they can produce a federal tax refund that is larger than the amount of money a person actually paid in during the year.

Refundable credits are contrasted with nonrefundable tax credits. The vast majority of tax credits are nonrefundable: meaning that these credits can reduce your federal income tax liability to zero, and any remaining credits won't be refunded to the taxpayer.

Refundable tax credits available to individual taxpayers include:

Naturally, withholding for federal income taxes and estimated taxes are also refundable credits, as these are prepayments towards a person's tax liability. Refundable tax credits, like payments, are applied towards a person's tax obligations, and any over-payments are refunded back to the taxpayer.
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