What is meant by refundable credit?

A refundable credit is a specific type of tax credit that allows taxpayers to receive a refund if the amount of the credit exceeds their actual tax liability. This means that if the taxpayer qualifies for a refundable credit and their tax owed is less than the credit, they can receive the difference as a cash refund.

For instance, if a taxpayer has a tax liability of $1,000 but qualifies for a refundable credit of $1,500, they will not only have their tax bill reduced to zero but will also receive a refund of $500. This feature distinguishes refundable credits from non-refundable credits, which can only lower the tax owed to zero but do not result in any cash refund when the credit amount exceeds the tax liability.

In contrast, the other options do not accurately define a refundable credit. Some options discuss aspects of credits that are either limited to reducing tax liability to zero or provide no opportunity for cash refunds, which does not capture the essence of what a refundable credit entails.