What is a nonrefundable tax credit?

A nonrefundable tax credit is defined as a credit that can reduce a taxpayer's tax liability but cannot create a refund when the credit exceeds the amount of tax owed. This means that if a taxpayer has a nonrefundable credit of a certain amount and their calculated tax due is lower than that amount, the credit will only reduce the liability to zero, and any remaining portion of the credit will be lost.

For instance, if a taxpayer has a tax liability of $500 and a nonrefundable credit worth $800, the credit will effectively reduce the tax owed to zero, but the taxpayer will not receive a refund for the remaining $300 of the credit. This characteristic is what distinguishes nonrefundable credits from refundable ones, which can generate a refund even if the tax liability is reduced to zero.

The other options do not accurately capture the essence of a nonrefundable tax credit. A refund possibility described in one option pertains to refundable credits instead, and the repetitive claim concept does not apply uniquely to nonrefundable credits, as both types of credits can be claimed in different tax years subject to qualifications. Moreover, restrictions to self-employed individuals in another option also do not relate to the definition of nonrefundable tax credits, as these