Types of Credits

• Tax credits can be refundable or non-refundable. A non-refundable tax credit offsets any tax liability that a taxpayer has for the year, with any credit remaining after that reduction carried forward to the next year. A refundable credit offsets any tax liability for the year, with any remaining amount after this offset refunded to the taxpayer. These refundable tax credits may result in a negative tax liability and may allow a person to receive more in a tax refund then they paid in taxes throughout the year.
  
  

Earned Income Tax Credit

• One of the more popular refundable tax credits that frequently results in a negative tax liability is the Earned Income Tax Credit. The EITC was created for low- and moderate-income individuals and families who work and earn money as a way to offset Social Security taxes, and provide an incentive for people to work. If a taxpayer is eligible for a credit that exceeds the amount of his tax liability for the year, he will receive a refund for the difference.
  
  

Adoption Tax Credit

• The adoption tax credit was created in 1997 to help offset the expenses that people face when adopting a child. A taxpayer can take a credit for the expenses that they pay in adopting a child without special needs, such as court costs and attorney's fees, up to $13,170 as of 2010. In addition, a person adopting a child with special needs may take the maximum credit even if he does not spend that much on the adoption. In 2010, the adoption tax credit changed from a non-refundable to a refundable credit, resulting in substantial negative tax liability for some adoptive families.
  
  

Other Refundable Credits

• The additional child tax credit allows some low- and moderate-income people to take what would normally be the non-refundable portion of the child tax credit of $1,000 per child as a refundable credit. The Making Work Pay credit, which started in 2009, allows married taxpayers who work to take a refundable credit of up to $800.