What is a Refundable Credit?
A nonrefundable credit can reduce the amount of tax you owe (your tax liability) to zero but not below. A refundable credit can reduce your tax liability to zero and IRS pays back (refunds) any remaining credit to you. For example, if your tax liability is $10,000 and your credit is $12,000, with a nonrefundable adoption credit you would reduce your tax liability to zero and carry the remaining $2,000 credit forward. With a refundable adoption credit, you reduce your tax liability to zero and also receive a refund of the $2,000 by which your credit exceeds your tax liability.
