What is a refundable credit? Give examples. What is a nonrefundable credit? Give examples.Tax credits are offset against the tax liability in a prescribed order. Explain why the order in which credits are utilized is important
Refundable Credit: Refundable credits are those which can be refunded after such credits are utilised for payment of tax.If you qualify for a refundable credit and the amount of the credit is larger than the tax you owe, you will receive a refund for the difference.
Eg: Child Tax credit, American opportunity credit.
Non refundable Credit: Unline refundable credits, non refundable credits cannot be refunded after reducing the tax liability to Zero. A nonrefundable credit is subtracted from your income tax liability, up to the total amount you owe.
Eg: benefits for adoption, raising children, earning foreign income
Since tax credits involve refundable & non refundable tax credits, utilisation of non refundable creditfirst against tax payable will give an advantage of getting the refund from refundable credit which is not utilised against the tax payable.