Refundable and Non-Refundable Tax Credit in Charts

One thing I’d like to learn to do a better job of this year is to communicate more effectively with visuals. A good picture is worth 1,000 words. In some of my old posts, I wrote 1,000 words but people still keep asking the very question I attempted to address. Clearly I wasn’t effective in getting the point across with 1,000 words.

The post Refundable Tax Credit and Non-Refundable Tax Credit is one of those posts. Let me try again with some charts.

The first chart above shows a person’s withholding and tax liability before any tax credit. Because this person didn’t withhold enough, he or she will owe some taxes at the time of filing.

This second chart shows after non-refundable tax credits (red block) are applied, the taxpayer will get a small refund instead of owing taxes. The non-refundable tax credits are capped by the tax liability. The best a person can do with non-refundable tax credits is to get all the withholding back. A non-refundable tax credit can increase your tax refund after all; it’s just the refund can’t exceed your withholding.

As you might have guessed, the refundable tax credits are not capped by one’s tax liability, as shown in this third chart. The refund can exceed the withholding.

So how did I do? Are these charts clearer than what I tried to convey before in words?

Once again, here’s the table that shows if a tax credit is refundable or not.

Tax Credit Refundable?
Additional Child Tax Credit Yes
Adoption No
Alternative Motor Vehicle Credit No
American Opportunity Credit 40% Refundable
Child and Dependent Care No
Child Tax Credit No
Earned Income Credit Yes
Elderly and Disabled Credit No
Excess Social Security Tax Withheld Yes
First-time Homebuyer Yes
Foreign Tax Credit No
Health Coverage Tax Credit Yes
Lifetime Learning Credit No
Residential Energy Efficient Property Credit No
Retirement Savings Contributions Credit (aka Saver’s Credit) No

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  1. Chuck says

    One problem is they’ve gone and used the word “refund” in two different ways. Sometimes it’s a return of overpayment, sometimes it’s paying out a credit that is greater than tax liability.

  2. Harry Sit says

    @jim – Thank you. I added Making Work Pay to the table.

    @Chuck – That’s the crux of the problem. It makes it hard to explain “I’m getting a larger tax refund because of some non-refundable tax credits.”

  3. Sammy_M says

    I’m a huge fan of visuals, but I think these statements in your prior post made the point pretty clearly: “A refundable tax credit can reduce your total tax to a negative number, which means the government pays you” and “If you pay enough taxes, it doesn’t matter whether a tax credit is refundable or non-refundable.” Not sure why some had such a hard time with the concept.

    Becoming better with visuals is one of my aims as well. Any good book recommendations on this?

  4. JW says

    I’m not sure the charts clearly explain your point, especially with the line at the top and bottom of withholding. The key takeaway is total take-home pay… If you displayed annual income in addition to the withholding and tax liability you could show that someone that qualifies for a refundable credit could end up with more money than they earned in a given year. An example using real-world numbers might help too.

  5. KD says

    I tend to use Powerpoint. With its nifty drawing tools, its a lot easier to create illustrations as long as you don’t need to use comparative data, say, as you would in excel. Just select all elements at the end and group them to create a wonderful picture and use it where ever you want.

  6. David H. says

    Care to send the book my way since you’ve finished it? haha. I like the charts you did fine. They illustrate what you had written well.

  7. Sandra says

    The visuals are great. I enjoy this website. It is helping me understand my “non-refundable” tax credit. I had hoped that the A/C contractor would have conveyed that this energy tax credit was a non-refundable, rather than not saying anything at all. The credit will probabaly be useless now in our case.

  8. Ludwig van says

    Help….Can someone please explain (SIMPLY) this Refundable American Opportunity Credit qualification…

    You do not qualify for a refund if 1, 2, and 3 below apply to you.

    1. You were:
    A. Under age 18 at the end of 2009, or
    B. Age 18 at the end of 2009 and your earned income (defined below) was less than one-half of your support (defined below), or
    C. A full-time student over age 18 and under age 24 at the end of 2009 and your earned income (defined below) was less than one-half of your support (defined below).
    2. At least one of your parents was alive at the end of 2009.
    3. You are not filing a joint return for 2009.

    Q. If I am a parent married filing joint return,(under 150,000$) do the above rules allow me to take both the credit refundable and non refundable for the expenses incurred for my 19 year old who is eligible and claiming as a dependent in my return?.

    Thank you

  9. Dave says

    I had a 401k loan that I took out in 2009, I was paying the loan back along with my regular contribution until October 2011. Then I resigned from my job and withdrew part of my 401k. When I got my 1099R from my plan I was taxed for the withdraw and the loan. This put me in a bad spot because I have to pay taxes for money I did not receive this year. Can I defer the taxes on the loan until 2012.

  10. B Chester says

    I filed state tax using non-refundable credit; these credits where toward community repairs and neighborhood upkeep, care for elderly, and other projects for community children and neighbors. All in cash and records show only what money was given for without details of each tranaction. How would I file over 5,000.00 under non-refundable credit with La State Tax Return?

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