What is a nonrefundable credit?

A nonrefundable credit is defined as a credit that can reduce a taxpayer's liability to zero but cannot result in a refund if the amount of the credit exceeds the tax owed. In other words, if a taxpayer has a tax liability of $300 and qualifies for a nonrefundable credit of $500, the credit will reduce the liability to zero, but the taxpayer will not receive the excess $200 back as a refund. This distinction is important because it means that while taxpayers can benefit from nonrefundable credits to lower their tax bills, they will not receive any payment for the unused portion of the credit.

The other options incorrectly describe the nature of nonrefundable credits. A nonrefundable credit does not allow for refunds beyond the amount of tax owed, which is why the understanding of how it operates is crucial for tax planning.