• Here’s a simple way to see the difference.
Suppose you owe $600 in federal income tax and qualify for a $1,000 tax credit.

With a nonrefundable credit, the credit can generally reduce your $600 tax to $0, but you generally don’t receive the unused $400 as a refund.

With a fully refundable $1,000 credit, the credit can reduce your $600 tax to $0—and the remaining $400 can be paid to you as a refund!

• The Earned Income Tax Credit is an important example.
The Earned Income Tax Credit (EITC) is a refundable federal credit designed primarily for low- and moderate-income workers and families. You must have earned income to qualify, and eligibility and the amount of the credit depend on factors including your income, filing status, and number of qualifying children. Income limits apply.

• Some credits can also be partially refundable.
The Child Tax Credit, for example, has a refundable portion known as the Additional Child Tax Credit. This means that depending on your circumstances, part of the credit may potentially be refunded even if you don’t owe enough tax to use the entire credit.

Bottom Line: You may benefit from filing a tax return even if your income is low enough that you aren’t otherwise required to file. If you qualify for a refundable tax credit, filing a return could result in money being refunded to you even when you owe little or no federal income tax.