What Are IRS Refundable Credits and Who Is Eligible?

A tax credit reduces a taxpayer’s final tax bill on a dollar-for-dollar basis. These credits are a direct subtraction from taxes owed, making them distinct from tax deductions, which only lower the amount of income subject to tax. The federal government uses tax credits to encourage certain financial behaviors or to provide relief to specific groups.

A refundable tax credit can result in a tax refund even if the taxpayer has no tax liability. If the credit amount is greater than the tax owed, the taxpayer receives the difference as a payment from the government. Many individuals who are not required to file a tax return may choose to do so specifically to claim these credits and receive a refund.

Understanding Refundable vs Nonrefundable Credits

The primary distinction between refundable and nonrefundable credits is what happens when the credit amount exceeds a taxpayer’s tax liability. A nonrefundable credit can reduce the tax you owe to zero, but any excess amount is lost. For example, if a taxpayer owes $800 in taxes and qualifies for a $1,000 nonrefundable credit, the credit will eliminate the $800 tax bill, but the remaining $200 of the credit cannot be used.

In contrast, a refundable credit allows a taxpayer to receive the full value of the credit. Using the same scenario, if the $1,000 credit were refundable, it would first cover the $800 in taxes owed, and the taxpayer would then receive the remaining $200 as a tax refund.

A third category, partially refundable credits, combines features of both. The American Opportunity Tax Credit is an example; 40% of any credit amount remaining after the tax liability is reduced to zero, up to a maximum of $1,000, is refundable.

Major Refundable Credits Available

The Internal Revenue Service (IRS) offers several refundable credits designed to support various segments of the population. These credits are intended to achieve policy goals, such as reducing poverty and assisting families with certain expenses.

The Earned Income Tax Credit (EITC) is a refundable credit that assists low- to moderate-income working individuals and families. The Child Tax Credit (CTC) helps families with the financial costs of raising children, and a portion of it, known as the Additional Child Tax Credit (ACTC), is refundable. For those pursuing higher education, the American Opportunity Tax Credit (AOTC) helps cover qualified education expenses and is partially refundable. The Premium Tax Credit (PTC) is another refundable credit created to help eligible individuals and families afford health insurance purchased through the Health Insurance Marketplace.

Determining Your Eligibility

Earned Income Tax Credit (EITC)

To qualify for the EITC, taxpayers must have earned income from a job or self-employment and meet income limits. For 2025, investment income is limited to $11,950. Married individuals must generally file a joint return to be eligible. The credit amount varies by income and the number of qualifying children, with 2025 income limits ranging from $19,104 for a single filer with no children to $68,675 for a married couple with three or more children. A qualifying child must meet specific age, relationship, and residency tests, but individuals without a qualifying child may still be eligible for a smaller credit.

Child Tax Credit (CTC) / Additional Child Tax Credit (ACTC)

Eligibility for the Child Tax Credit (CTC) and its refundable part, the Additional Child Tax Credit (ACTC), requires a qualifying child under age 17 at the end of the tax year. The child must have a Social Security number and be claimed as a dependent. For 2025, the CTC is worth up to $2,000 per child, but it phases out for taxpayers with a modified adjusted gross income over $400,000 for married couples and $200,000 for other filers. The refundable ACTC allows taxpayers to receive up to $1,700 per child as a refund.

American Opportunity Tax Credit (AOTC)

The AOTC is available to taxpayers who pay for qualified education expenses for an eligible student. The student must be pursuing a degree or other credential and be enrolled at least half-time for at least one academic period. The student must not have completed the first four years of higher education. The credit is worth up to $2,500 per student, calculated as 100% of the first $2,000 in expenses and 25% of the next $2,000. To claim the full credit, a taxpayer’s modified adjusted gross income must be $80,000 or less ($160,000 for married filing jointly), with a phase-out for higher incomes. Up to $1,000 of the AOTC is refundable.

Premium Tax Credit (PTC)

The Premium Tax Credit helps make health insurance more affordable for those who purchase coverage through the Health Insurance Marketplace. For tax years through 2025, your household income must be at least 100% of the federal poverty line. You must not be eligible for other qualifying health coverage, such as through an employer or a government program like Medicare or Medicaid. Married couples must file a joint tax return to be eligible. Taxpayers can receive the credit in advance to lower their monthly premium payments or claim the full amount when they file their tax return.

How to Claim Refundable Credits

To receive the benefit of refundable credits, you must file a federal income tax return, even if you are not otherwise required to do so. The process involves completing specific forms or schedules for the credit you are claiming, which are submitted with your Form 1040.

For the Earned Income Tax Credit with a qualifying child, you will need to complete and attach Schedule EIC. The Child Tax Credit and the Additional Child Tax Credit are calculated using Schedule 8812. To claim the American Opportunity Tax Credit, you must file Form 8863, Education Credits. For the Premium Tax Credit, you will need to complete Form 8962, which reconciles the amount of advance credit payments you received with the actual credit you are eligible for based on your final income.

After completing the forms, the calculated credit amounts are transferred to your Form 1040. Nonrefundable portions reduce your tax liability, while refundable portions are added to your total payments, which can result in a larger refund.