This might sound confusing, but you can still receive a tax refund in excess of a non refundable tax credit that you claim. Whether you receive the full value of a non refundable tax credit has to do with your tax liability, not the amount owed by the tax filing deadline.

Tax Liability

It's easiest to define this via a 1040. I've uploaded the 2018 1040 here (you can always find the latest 1040 here, but I want to use a particular year's 1040 in case the line numbers change). Your tax liability is the amount on line 11 - that is, the taxes that you would pay solely based on adding up all of your income, and then subtracting all of the "above the line" deductions (the ones that don't require you to itemize to claim), which can be found on Schedule 1 (there's a draft of Schedule 1 here).

Non-Refundable Credits

Non refundable credits can only at most reduce your tax liability down to zero. You report these credits on Schedule 3 (draft can be found here) and their total on line 12 of the 1040. And you can see from line 13, which says to subtract line 12 from line 11 (your liability), but if it's zero or less, enter 0, that your non refundable credits cannot exceed your tax liability.

Refundable Credits

Refundable credits, on the other hand, are not affected by your tax liability. Refundable credits are reported on Schedule 5 (draft can be found here and the sum is reported on line 17 of the 1040. And from lines 18 and 19, you can see that all refundable credits are eligible to be refunded to you if your payments and refundable credits exceed your liability.

Non-Refundable Credits Can Still Result in a Tax Refund

Imagine that your tax liability (line 11 on your 1040) was $3000. If you had $1500 withheld from your paychecks by your employer for federal taxes, and then qualify for a $1000 non refundable credit, you'd receive a $500 refund. And conversely, if you only had $500 withheld from your paychecks with a $3000 tax liability and a $1000 non refundable credit, you'd still owe the government $1500.
But, if your tax liability was $3000, had $1500 withheld from your paychecks by your employer, and qualified for a $7500 non-refundable tax credit, you'd only receive a refund a $1500, because you liability would be reduced to $0 (giving up $4500 of that tax credit), and you'd be refunded the $1500 withheld from your paychecks.

Neither your tax withholding or refund/amount due affects whether you receive the full value of a non-refundable tax credit.

Can't Maximize a Non Refundable Credit? Plan Ahead with a Roth Conversion!

Roth conversion: At any time, you can convert money from your traditional IRA (tIRA) to a Roth IRA. Because you received a tax deduction for your tIRA contributions previously,[1] the converted amount is included in your income in the year of your conversion, and is subject to taxation.

Suppose you have a federal tax liability of $5000, but bought an electric car that is eligible for the full $7500 non-refundable federal tax credit. In this scenario, your $7500 credit would knock your federal tax liability down to $0, but you would lose out on $2500.

Assuming you have a tIRA (or a 401(k) that you could rollover into a tIRA), you could convert money from your tIRA to a Roth IRA without paying any federal taxes, until your tax liability reaches $7500. That is, suppose your federal marginal tax rate was 22%. Then you could convert $2500/.22 = $11,363 of tIRA money to a Roth IRA without paying any federal taxes.

Unfortunately, in most (all?) states that have an income tax, you will pay state taxes on this conversion, as the conversion amount is added to your federal Adjusted Gross Income (AGI) and most (all?) states start with your federal AGI when determining your state tax liability. The previously mentioned electric vehicle tax credit is a federal tax credit, and it is up to the states to offer their own (I assume most do not, and even if they did, I doubt they'd be worth $7500). However, considering most states' top marginal tax brackets are under 10%, I would recommend doing so if you are eligible for a non refundable tax credit that you will not fully utilize otherwise. By doing this conversion it would be as if you made a direct Roth contribution while only paying your state's marginal tax rate in taxes.

Note that the Tax Cuts and Jobs Act of 2017 eliminated the ability to recharacterize (undo) Roth IRA conversions.


  1. It is possible to make non deductible contributions to a tIRA, which is what makes the Backdoor Roth possible, but we're ignoring that here ↩︎