Inflation Reduction Act Tax Credit for Heat Pumps (25c) - based on what tax liability?

[s_c_1]

Looking for any additional detail or clarification from someone who knows on the IRA tax credit under section 25C, specifically on heat pump water heaters.  From what I have read this is a non-refundable credit that can reduce my tax liability.  Where I have seen disagreement is exactly what tax liability it is based on.

Is it a reduction of the overall tax liability - i.e. IRS Form 1041 lines 16 or 24?

Or does a taxpayer only receive the credit if they actually owe additional taxes when they file - shown in Form 1040 Line 37 ("Amount You Owe")

In other words - and to put numbers on it - if I plan my tax withholding correctly so that my total tax liability (line 16 or 24) is $10,000... and my payroll deductions total $11,000, leaving me a tax refund of $1,000... and the cost of a new heat pump water heater installed is such that I would receive the full $2,000 tax credit...

Would I receive an additional $2,000 back (totaling $3k tax refund because the $2,000 tax credit reduced my $10k tax liability to $8k)?  Or will I receive no tax credit because I am already receiving a refund?

It seems like it should be the former (based on Line 16 or 24), but I have seen other explanations that seem to refer to the latter.

thanks for the feedback

[NCperson · Accepted solution]

@s_c_1 - the non-refundable credits are on line 17 and 19.  What 'non-refundable' means is that the tax on Line 16 can be reduced with non-redunfable credits, but the result (Line 22) can not be less than  zero. it's that simple. 

Let's say the tax on Line 16 is $2,000 and you have a non-refundable credit for $3,0000.  Then Line 17 is going to be $2,000 (and not $3,000) because Line 22 can not be less than zero. In some cases the $1,000 can be carried over to be used the next year but in other cases (the EV credit for example), it's lost forever.  

A 'refundable credit' reduces whatever is on line 22, even if it means the answer goes below zero (meaning you get a refund!).  these credits get posted on lines 27a as well as 28-31.

note that the line numbers are the same on Form 1040 in both 2021 and 2022. 

<<Would I receive an additional $2,000 back (totaling $3k tax refund because the $2,000 tax credit reduced my $10k tax liability to $8k)?  Or will I receive no tax credit because I am already receiving a refund?>>

to answer your specific question, you;d receive the additional $2,000.  You are correct that your tax liability (line 16) would be reduced by the tax credit with the remaining tax liability displayed on Line 22 - and since Line 22 is more than zero, you'd get the full benefit of the tax credit.