What does the term 'non-refundable credit' refer to?

The term 'non-refundable credit' refers to a tax credit that can reduce a taxpayer's tax liability to zero, but it cannot reduce it below zero. This means that if the amount of the credit exceeds the total amount of tax owed, the excess cannot be refunded to the taxpayer. Instead, the credit can only be used to offset the tax owed dollar for dollar, effectively lowering the amount that the individual has to pay. This concept is crucial for individuals to understand in tax planning, as it affects how much tax benefit they can receive from certain credits.

In affecting tax obligations, non-refundable credits provide valuable support but do not yield any financial benefit beyond reducing tax liability. This makes them distinctly different from refundable credits, which can result in a payment to the taxpayer if the credited amount is greater than the taxes owed. Understanding the nature of non-refundable credits helps taxpayers better plan their financial decisions related to taxes and potential refunds.