Of your American Opportunity Tax Credit, you most likely qualified for the full $1,000 refundable portion and only a portion of the nonrefundable credit to zero out your federal income tax.
- The American Opportunity Credit is actually two credits.Up to or the maximum $1,500 is a nonrefundable credit and up to or the maximum $1,000 is a refundable credit, for a maximum total of $2,500.
Refundable tax credits, are treated as payments of tax you made during the year. When the total of these credits is greater than the tax you owe, the IRS sends you a tax refund for the difference.
A nonrefundable credit essentially means that the credit can’t be used to increase your tax refund or to create a tax refund when you wouldn’t have already had one. In other words, your savings cannot exceed the amount of tax you owe.
- For example, if the only credit you’re eligible for is a $500 Child and Dependent Care Expenses credit, and the tax you owe is only $200—the $300 excess is nonrefundable. This means that the credit will eliminate the entire $200 of tax, but you don’t receive a tax refund for the remaining $300.
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Source: TurboTax FAQ
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