What is a refundable tax credit?

A refundable tax credit is a type of tax benefit that reduces the taxpayer's liability and can result in a refund if the credit exceeds the amount of taxes owed. This means that if a taxpayer qualifies for a refundable credit and their tax liability is less than the amount of the credit, the excess amount is paid back to them as a refund.

For instance, if a taxpayer has a tax liability of $500 and they qualify for a refundable tax credit of $800, they will not only reduce their tax liability to zero but also receive the excess amount of $300 as a refund.

Understanding the mechanics of refundable tax credits is vital because it emphasizes their role in lowering financial burdens for taxpayers and potentially providing additional financial support when needed, especially for low- to moderate-income individuals.