How can a tax credit affect a taxpayer’s refund?

A tax credit can significantly impact a taxpayer's refund by reducing their overall tax liability, which in turn can increase the refund amount they receive. When a taxpayer claims a tax credit, it lowers the amount of tax they owe to the government. If the credits bring the tax liability down to a point where the taxpayer has paid more in withholdings throughout the year than what they owe after applying the credit, they are eligible for a refund of the difference.

For example, if a taxpayer has a tax liability of $1,000 but is eligible for a tax credit of $300, their new liability would be $700. If they had already paid $1,000 in taxes through withholding, they would then receive a refund of $300, effectively increasing their refund due to the tax credit.

This mechanism illustrates the direct connection between tax credits and refunds, emphasizing how the former can lead to a higher refund if it reduces the amount of tax owed below what has already been paid. Other options do not accurately reflect this relationship; some incorrectly suggest that tax credits have no effect on refunds or only affect state taxes.