A credit beats a deduction dollar for dollar. A refundable credit can put cash in the client's pocket even after tax hits zero. Knowing which credits refund, which only zero out tax, and which carry forward is the whole game on this section.
A non-refundable credit reduces tax to zero and stops. The unused portion either dies that year or carries forward (FTC, Adoption, General Business). A refundable credit acts like withholding: any excess over tax liability comes back as a refund.
The order matters on Schedule 3 and Form 1040. Non-refundable credits go on Schedule 3 Part I and reduce tax on Form 1040 line 22. Refundable credits and refundable portions sit on Schedule 3 Part II and Form 1040 lines 28 and 31, increasing the refund or reducing the balance due directly.
The child tax credit (CTC) is $2,200 per qualifying child under age 17 at year end with a Social Security Number issued before the return due date (including extensions).
Common mistakes
- Claiming the full $2,200 CTC for an ITIN child. An ITIN child gets only the $500 ODC. The SSN must be issued by the return due date including extensions.
- Stacking AOTC and LLC for the same student. Only one education credit per student per year. You can mix across students on one return, but never for the same person.
- Forgetting that FEIE-excluded income cannot generate FTC. Foreign tax allocable to the excluded $130,000 (2025) is not creditable. Allocate by ratio of excluded income to total foreign income.
Bottom line
- Refundable credits (EITC, ACTC, 40% of AOTC, Premium Tax Credit, Health Coverage Tax Credit, and beginning 2025 up to $5,000 of the Adoption credit) can refund past zero tax; non-refundable credits (CTC remainder, CDCC, LLC, FTC, Saver's, Energy, the Adoption...
- 2025 CTC is $2,200 per qualifying child under 17 with an SSN, phasing out $50 per $1,000 above $200,000 single / $400,000 MFJ; $500 ODC for other dependents
- ACTC is the lesser of unused CTC, 15% of earned income over $2,500, or $1,700 per child
- CDCC caps expenses at $3,000 (one qualifying person) / $6,000 (two-plus), scaled by an AGI-based 20% to 35% rate; both spouses need earned income (or deemed earnings as students or disabled)
Exam shortcut
"SSN by due date" filter. When a question mentions an ITIN or a late-issued SSN, eliminate CTC, refundable ACTC, and EITC immediately. Only the $500 ODC remains for ITIN dependents. AOTC vs LLC two-question check. Ask: half-time in first 4 years? If yes, AOTC. If no (graduate, part-time, fifth-year, single course), LLC. Same MAGI phaseout, so the eligibility test is purely the enrollment profile. Form 8867 trigger list.
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Learning objectives
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