Say: My total fed tax liability is 60K.

I've made estimated payments of 65K. (keeping withholdings out of picture here for simplicity)

I'll expect a tax refund of 5K.

I also installed solar panels and so expecting a non-refundable tax credit of 3K.

How much refund would I get, 8K or just 5K?

Is non-refundable tax credit anyways affected by the tax payments (withholdings or estimated payments)?

  • 2
    Are you in the United States? Sep 18 at 20:43
  • @ChrisW.Rea, yes.
    – Happy Town
    Sep 18 at 21:34

You would get an $8k refund. Non-refundable tax credits don't literally mean you can't get a refund in the sense that most people think (i.e. a check or direct deposit from the IRS); it means you can't get a refund beyond your payments (i.e. withholding and estimated taxes).

Look at Form 1040. Your non-refundable tax credits are totaled on Schedule 3 line 7, which transfers to 1040 line 20. This reduces your tax (but not below $0, i.e. non-refundable), excluding self-employment and a few other special taxes on Schedule 2. So your total tax is effectively $57k instead of $60k. Then your estimated tax payments (1040 line 26) are treated similarly to a refundable tax credit, which means you get the entire $65k - $57k = $8k refunded.

  • 9
    It might be helpful (if my understanding here is right) to spell this out explicitly: "non-refundable" means that it can't reduce your NET taxes below zero, NOT that you can't get a refund of it (as long as it would still leave your net taxes positive.) It's kind of weird terminology. Sep 19 at 4:06
  • @GlennWillen Good suggestion, I edited to try to clarify.
    – Craig W
    Sep 19 at 17:57

If your income is so low that your tax liability would either be zero, or less than the $3,000 non-refundable tax credit, then you wouldn't be entitled to the whole $3,000 credit.

What happens in April each year is a settlement between what you have paid them, and what you should have paid them. Overpaying doesn't change what you should have paid them. Underpaying only impacts what you should have paid if it exposes you to interest and penalties.

The fact you are getting a refund in April is different from the refundable status or non-refundable status of a tax credit.

If a married couple with no kids has only $15,000 in income, which is less than the $24,000 standard deduction, then they have no tax liability. This makes them ineligible for non-refundable tax credits.

Congress is very careful about this point because it can determine who can and who can't benefit from the tax credit.

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