For tax purposes, what is considered a nonrefundable credit?

A nonrefundable credit is specifically designed to reduce the taxpayer's tax liability but cannot result in a refund. It means that the credit can be used to offset any taxes owed, bringing the tax liability down to zero, but not creating any excess that could be refunded to the taxpayer.

This is an important concept in tax preparation because it distinguishes how different types of credits function. Nonrefundable credits essentially act as a cap; once they have reduced the tax liability to zero, any remaining unused portion of the credit does not carry over or lead to a refund. Therefore, they solely offset taxes owed. Understanding this ensures taxpayers can accurately account for their tax credits and the potential tax benefits they can receive.