What does a refundable tax credit allow a taxpayer to do?

A refundable tax credit provides taxpayers with the ability to not only reduce their tax liability to zero but also to receive a refund if the credit exceeds the amount of taxes owed. This means that if a taxpayer's tax liability is less than the refundable credit, the taxpayer can get the difference refunded as cash.

For example, if a taxpayer has a tax liability of $500, but they qualify for a refundable tax credit of $1,000, they can use the credit to eliminate the $500 tax owed and receive the remaining $500 as a refund. This feature distinguishes refundable tax credits from non-refundable ones, as non-refundable credits can only reduce the tax liability to zero without providing any refund.

In contrast, options indicating that refundable tax credits only reduce taxable income or that they reduce tax liability without any possibility of a refund misunderstand the nature of these credits. Additionally, the option about applying only once a year does not accurately represent how refundable tax credits function since they can be claimed at the time of filing taxes, subject to eligibility requirements.