A direct, dollar-for-dollar reduction of one's tax liability in which one still receives a tax refund even if one's liability drops below zero. That is, if a taxpayer otherwise owes $2,000 to the government, but takes $3,000 in refundable credits, then the government owes $1,000 to the taxpayer. Relatively few tax credits are refundable; most are limited to the amount of one's tax liability. However, the earned income tax credit is a common example of a refundable credit.
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A credit for which the IRS will send the taxpayer a refund for any amount in excess of the taxpayer's tax liability.
Copyright © 2008 H&R Block. All Rights Reserved. Reproduced with permission from H&R Block Glossary