Discuss the difference between a refundable tax credit and a nonrefundable tax credit. Give at least one example of each type of credit.

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Part $1$

A$.$

A refundable tax credit is a type of negative income tax. If the credit exceeds the tax$$ liability, the government pays the taxpayer the excess credit. A nonrefundable tax credit resembles a direct subsidy. It may only be used to offset the$$ taxpayer's tax liability.$$ Therefore, if the credit exceeds the tax$$ liability, the taxpayer receives no payment$$ and, at$$ best, can only carryback or carryforward the excess credit. The adoption credit is a refundable tax credit. The business energy tax credit is an example of a nonrefundable credits.

B$.$

A refundable tax credit resembles a direct subsidy. It is a type of negative income tax. If the credit exceeds the tax$$ liability, the government pays the taxpayer the excess credit. A nonrefundable tax credit may only be used to offset the$$ taxpayer's tax liability.$$ Therefore, if the credit exceeds the tax$$ liability, the taxpayer receives no payment$$ and, at$$ best, can only carryback or carryforward the excess credit. Dependent care credits and tax credits for the elderly are refundable tax credit. The earned income credit is an example of a nonrefundable credits.

C$.$

A refundable tax credit resembles a direct subsidy. It is a type of negative income tax. If the credit is less than the tax$$ liability, the government pays the taxpayer the excess credit. A nonrefundable tax credit may only be used to offset the$$ taxpayer's tax liability.$$ Therefore, if the credit is less than the tax$$ liability, the taxpayer receives no payment$$ and, at$$ best, can only carryback or carryforward the excess credit. The earned income credit is a refundable tax credit. Dependent care credits and tax credits for the elderly are examples of nonrefundable credits.

D$.$

A refundable tax credit resembles a direct subsidy. Because it can fully offset an income tax liability and generate a tax$$ refund, it is a type of negative income tax. A nonrefundable tax credit may only be used to offset the$$ taxpayer's tax liability. If the credit exceeds the tax$$ liability, the taxpayer receives no refund$$ and, at$$ best, can only carryback or carryforward the excess credit. The earned income credit is a refundable tax credit. Dependent care credits are nonrefundable credits.