December 07, 2023

Tax Policy 101: Tax Refundability

Tax policy is complicated. Talking about taxes involves jargon, and concepts that can be confusing. For example, what is a 'refundable' tax credit? What exactly does that mean, and how does it help families? We answer these questions here with a quick breakdown of what refundability is and how it impacts families.

What is a "refundable" tax credit?

When a tax credit is refundable, it is available to all families. Even if a family doesn’t owe anything when they file their income taxes, a refundable tax credit makes it possible for them to get money back in the form of a tax refund. Families can then use that money to pay for necessities. 

What is a "non-refundable" tax credit?

A non-refundable tax credit can only ever be used to pay for taxes. If a family doesn’t owe any taxes after deductions, they can’t access any of the tax credit. If the family only owes a little in income taxes, they can only use the non-refundable credit to pay down whatever they owe.

How does refundability impact a family like yours?

In the illustrated example below, the Thompsons have two young children and make a family household income of $39,520 for the year. Based on their income and after deductions, they owe $200 in taxes. Now imagine they qualify for a $500 tax credit. Refundability can greatly impact how much they owe in taxes and whether they'll keep more of their earnings through a refund. 

If the $500 tax credit is non-refundable, it will be applied to offset what the Thompsons owe in taxes. Since they owe $200, the credit will help reduce the amount they owe to $0 – a positive outcome.

However, an even better outcome for young families arises when that $500 tax credit is refundable. If refundable, the $500 tax credit can go towards the amount they owe in taxes ($200) and the remaining amount of $300 would go back to the Thompsons as a refund. This $300 can help with expenses like car repairs, new winter coats for the kids, and baby formula. Though it may not seem like a lot, families facing financial challenges can make good use of this help.

Refundability 101 1

  

To learn more about making Utah’s EITC refundable, go here.

To learn more about making Utah’s CTC refundable, go here.

To read about other refundable tax credits in Utah, go here.

 


Glossary

Tax Credit: a dollar-for-dollar amount that a taxpayer (s) claim on their tax return to reduce the income tax they owe. You can use this to reduce your tax bill and potentially increase your refund amount.

Nonrefundable Tax Credit: reduces the taxes you owe --- allows a taxpayer to only receive a reduction of their tax liability until it reaches zero.

Refundable Tax Credit: allows a taxpayer to receive a refund if the credit they receive is greater than their tax liability.

Tax Policy: policies that determine how we collect taxes.